One way to find stocks with a better chance to outperform the market is to look for a certain type of stocks with above average growth prospects. Those stocks would have to show stable financial conditions and generate significant free cash flow, but cannot be too expensive at the moment. 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. I looked also for companies that are generating enough return to offset the risk of a loss. 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 3000 index. Russell Investment explanation: "The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected."
- Earnings growth estimates for the next 5 years (per annum) is greater than 17%.
- Price to free cash flow is less than 15, (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 0.5.
- Sharpe Ratio is greater than 1. Sharpe Ratio definition by Investopedia: "A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns."
I used Portfolio123's powerful free screener to perform the search. After running this screen on September 09, 2012, I obtained as results the 4 following stocks:
Blucora, Inc. (BCOR)
Blucora, Inc. has low debt (total debt to equity is only 0.18) and its price to free cash flow for the trailing 12 months is 13.77. The average annual earnings growth for the past 5 years was very high, 46.6%, and the average earnings growth estimates for the next 5 years (per annum) is also high, 20%. For the second quarter of 2012, Blucora reported a sixth consecutive quarter of beating expectations and raising outlook. BCOR stock seems to be a good investment right now.
Blucora, Inc., together with its subsidiaries, provides white label search and monetization solutions to Web publishers worldwide. The company also operates its own branded search sites, including Dogpile, a metasearch engine, as well as MetaCrawler and WebCrawler. In addition, it offers online tax preparation solutions to consumers and professional preparers. The company was formerly known as InfoSpace, Inc. and changed its name to Blucora, Inc. in June 2012. Blucora, Inc. was founded in 1996 and is headquartered in Bellevue, Washington.
Duff & Phelps Corporation (DUF)
Duff & Phelps has very low debt (total debt to equity is only 0.07) and its price to free cash flow for the trailing 12 months is only 9.44. The average annual earnings growth estimates for the next 5 years is 17.5%. DUF is paying dividend, its forward annual yield is quite high 2.70%. All these factors make the stock quite attractive.
Duff & Phelps Corporation, together with its subsidiaries, engages in the provision of independent financial advisory and investment banking services in North America, Europe, and Asia. The company operates in three segments: Financial Advisory, Alternative Asset Advisory, and Investment Banking. The Financial Advisory segment offers valuation advisory, tax, and dispute and legal management consulting services. Duff & Phelps Corporation was founded in 1932 and is based in New York, New York.
Middleby Corp. (MIDD)
Middleby Corp. has relatively low debt (total debt to equity is 0.48) and its price to free cash flow for the trailing 12 months is only 14.9. The average annual earnings growth estimates for the next 5 years is quite high, 19%.
On September 7, 2012, Middleby announced the acquisition of Stewart Systems Global, LLC, a leading manufacturer of baking systems for the food processing industry with annual revenues of approximately $30 million. This acquisition further strengthens the Middleby portfolio of brands and technologies serving the food processing industry. All these factors make the stock quite attractive.
The Middleby Corporation, through its subsidiaries, engages in the design, manufacture, marketing, distribution, and service of commercial foodservice and food processing equipment in the United States, Canada, Asia, Europe, the Middle East, and Latin America. The company's Commercial Foodservice Equipment Group segment manufactures cooking equipment for restaurants and institutional kitchens. The Middleby Corporation was founded in 1888 and is based in Elgin, Illinois.
Netspend Holdings, Inc. (NTSP)
Netspend Holdings has very low debt (total debt to equity is only 0.06), and its price to free cash flow for the trailing 12 months is only 11.5. The average annual earnings growth estimates for the next 5 years is high, 20.6%.
On August 02, 2012, NetSpend reported that it raised its guidance and expects full year 2012 revenue to now be between $347 and $353 million, its adjusted EBITDA to fall between $93 and $97 million and its adjusted net income per fully diluted share to be between $0.54 and $0.58. NTSP stock seems to be a good investment right now.
Netspend Holdings, Inc., together with its subsidiaries, provides general purpose reloadable [GPR] prepaid debit and payroll cards, and alternative financial service solutions to underbanked and other consumers in the United States. Its GPR cards offer access to FDIC-insured depository accounts with a menu of pricing and features tailored to underbanked consumers needs; and serves as access devices to an FDIC-insured depository account with a bank. The company was founded in 1999 and is based in Austin, Texas.