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In looking for future winners among large-caps, I searched for stocks with above average growth prospects. Those 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:

  1. 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."
  2. Earnings growth estimates for the next 5 years (per annum) is greater than 10%.
  3. Price to free cash flow is less than 14, (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).
  4. Long term debt to equity is less than 0.5.
  5. 10-day moving average is over 20-day moving average, and the cross happened 3 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 12, 2012, I obtained as results the 4 following stocks (click to enlarge images):

Data: Finviz.com

EMC Corporation (EMC)

EMC has very low debt (total debt to equity is only 0.08) and its price to free cash flow for the trailing 12 months is only 10.87. The average annual earnings growth estimates for the next 5 years is 14.1%. EMC reported strong financial results for the second quarter of 2012, marking the company's 10th consecutive quarter of double-digit year-over-year growth for consolidated revenue, GAAP net income, and GAAP and non-GAAP EPS. EMC expects to achieve its full-year 2012 goals for consolidated revenue, non-GAAP EPS and free cash flow. Among the 38 analysts covering the stock, 12 rate strong buy, 24 rate buy and only 2 rate hold. EMC stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

EMC Corporation develops, delivers, and supports the information and virtual infrastructure technologies and solutions. The company offers enterprise storage systems and software, which are deployed in storage area networks (SAN), networked attached storage (NAS), unified storage combining NAS and SAN, object storage, and/or direct attached storage environments, as well as provides backup and recovery, and disaster recovery and archiving solutions. The company was founded in 1979 and is headquartered in Hopkinton, Massachusetts.

Chart: Finviz.com

Open Text Corp. (OTEX)

Open Text Corp. has relatively low debt (total debt to equity is 0.51) and its price to free cash flow for the trailing 12 months is only 13.58. The average annual earnings growth for the past 5 years was very high 38%, and the average annual earnings growth estimate for the next 5 years is also high 20.45%. In fiscal year 2012 OpenText delivered its best revenue and non-GAAP earnings in its 20 year history. With revenue up 17% and non-GAAP earnings up 13%, it has consistently grown revenue and non-GAAP earnings year-over-year for the last 7 fiscal years. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

Open Text Corporation provides a suite of information management software products and solutions. The company licenses and sells software product offerings, including Enterprise Content Management that assists customers with content management, collaboration tools, records management, email management, and archiving capabilities; Business Process Management for analyzing, automating, monitoring, and optimizing structured business processes; and Customer Experience Management with Web content management, digital asset management, social media applications, customer communications management, portal, and mobility solutions. Open Text Corporation was founded in 1991 and is headquartered in Waterloo, Canada.

Chart: Finviz.com

State Street Corporation (STT)

State Street has relatively low debt (long term debt to equity is only 0.32) and its price to free cash flow for the trailing 12 months is only 6.21. The average annual earnings growth estimate for the next 5 years is 10%. The company is paying dividend, its forward annual dividend yield is 2.20%. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

State Street Corporation, a financial holding company, provides various financial products and services to institutional investors worldwide. The company's Investment Servicing business line provides products and services, including custody, product- and participant-level accounting; daily pricing and administration; master trust and master custody; record-keeping; foreign exchange, brokerage, and other trading services; securities finance; deposit and short-term investment facilities; loan and lease financing; investment manager and alternative investment manager operations outsourcing; and performance, risk, and compliance analytics. State Street Corporation was founded in 1832 and is headquartered in Boston, Massachusetts.

Chart: Finviz.com

Thermo Fisher Scientific, Inc. (TMO)

Thermo Fisher Scientific has relatively low debt (total debt to equity is 0.43) and its price to free cash flow for the trailing 12 months is 13.39. The average annual earnings growth for the past 5 years was very high 25.3%, and the average annual earnings growth estimate for the next 5 years is 11.3%. On July 25, 2012 TMO announced an additional $500 million share buyback authorization, which gives it $750 million for share buybacks in the second half of the year. Among the 21 analysts covering the stock, 8 rate strong buy, 8 rate buy and 5 rate hold. TMO stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

Thermo Fisher Scientific, Inc. provides analytical instruments, equipment, reagents and consumables, software, and services for research, manufacture, analysis, discovery, and diagnostics. Its Analytical Technologies segment offers products for use in applications in the laboratory, on the production line and in the field. These products are used by customers in markets, including healthcare and diagnostics; pharmaceutical and biotechnology, academic and government, and industrial and applied markets. Thermo Fisher Scientific Inc. was founded in 1956 and is headquartered in Waltham, Massachusetts.

Chart: Finviz.com

Source: 4 Large-Cap Growth Stocks With Positive Momentum