Looking for future winners among the large-cap stocks, I searched for stocks with above-average growth prospects. These stocks would have to show stable financial conditions and generate significant free cash flow. However, in order to find the proper moment for an opening position, a technical analysis with a momentum indicator can be of great assistance for investors.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all following demands:
- The stock is included in the Russell 1000 index. Russell Investment explanation: "The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected."
- Earnings growth estimates for the next five years (per annum) is greater than 12%.
- Price to free cash flow is less than 16, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
- Total debt to equity is less than 0.6.
- 10-day moving average is over 20-day moving average, and the cross happened 2 days or less prior to the start of the screen (Short term momentum indicator).
I used Portfolio123's powerful free screener to perform the search. After running this screen on September 8, 2012, I obtained, as a result, the following four stocks:
Click to enlarge
Expedia, Inc. (EXPE)
Expedia, Inc. has relatively low debt (total debt to equity is 0.56) and its price to free cash flow for the trailing 12 months is only 8.44. The average annual earnings growth estimates for the next 5 years is 12.5%.
As for July 26, 2012, Expedia allocated $521 million to share repurchases, acquisitions and dividends; returning over $320 million directly to shareholders. In addition, subsequent to quarter end, the Executive Committee of Expedia's Board of Directors approved raising Expedia's quarterly dividend to $0.13 per share of outstanding common stock. All these factors make the stock very attractive.
Expedia, Inc., together with its subsidiaries, operates as an online travel company in the United States and internationally. It provides travel products and services to leisure and corporate travelers, offline retail travel agents, and travel service providers through a portfolio of brands, including Expedia.com, hotels.com, Hotwire.com, Expedia Affiliate Network, Classic Vacations, Expedia Local Expert, Expedia CruiseShipCenters, Egencia, eLong, Inc., and Venere Net SpA. The company was founded in 1996 and is headquartered in Bellevue, Washington.
Genpact Limited (G)
Genpact Limited has low debt (total debt to equity is 0.24) and its price to free cash flow for the trailing 12 months is only 14.68. The average annual earnings growth for the past five years was very high, 29.64%, and the average annual earnings growth estimate for the next five years is 15.56%. Analysts favor the stock; among the 9 analysts covering the stock, 5 rate it as a strong buy.
Genpact Limited provides business process and technology management services worldwide. Its finance and accounting services include accounts payable services, payment and inquiry management, order to cash services, preparation of financial statements, closing and reporting, cash management, treasury, cash flow analysis, tax return preparation, financial planning and analysis, governance, and internal controls services; and supply chain and procurement services comprise sourcing and procurement, demand forecasting and management, engineering, inventory optimization and planning, fleet and logistics, and aftermarket services. The company was founded in 1997 and is based in Hamilton, Bermuda.
KBR, Inc. (KBR)
KBR has almost no debt (total debt to equity is only 0.03) and its price to free cash flow for the trailing 12 months is only 15.8. The average annual earnings growth estimate for the next 5 years is 12%.
During the second quarter of 2012, KBR had share repurchases of $18 million, capital expenditures of $17 million, pension contributions of $7 million, and quarterly dividend payments of $8 million for total cash deployment of $50 million. All these factors make the stock quite attractive.
KBR, Inc. operates as an engineering, construction, and services company worldwide. The company's Hydrocarbons segment designs and constructs liquefied natural gas and gas-to-liquids facilities for the development and transportation; and delivers onshore and offshore oil and natural gas production facilities, including platforms, floating production and subsea facilities, and pipelines. The company was founded in 1901 and is headquartered in Houston, Texas.
McKesson Corporation (MCK)
McKesson Corporation has relatively low debt (total debt to equity is 0.50) and its price to free cash flow for the trailing 12 months is 13.99. The average annual earnings growth estimate for the next 5 years is 12.48%. Analysts favor the stock; among the 18 analysts covering the stock, 4 rate it as a strong buy, 9 rate it a buy and 5 rate it a hold. MCK stock seems to be a good investment right now.
McKesson Corporation, together with its subsidiaries, delivers pharmaceuticals, medical supplies, and health care information technologies to the healthcare industry primarily in the United States. It operates in two segments, McKesson Distribution Solutions and McKesson Technology Solutions. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products in North America. McKesson Corporation was founded in 1833 and is headquartered in San Francisco, California.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.