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In looking for future tech stock winners, I search for companies with high growth prospects. The stocks I look for 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 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."
  2. Earnings growth estimates for the next 5 years (per annum) is greater than 17%.
  3. Price to free cash flow is less than 19 (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. Total debt to equity is less than 0.2.
  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

Entropic Communications, Inc. (NASDAQ:ENTR)

Entropic Communications has no debt at all and its price to free cash flow for the trailing 12 months is only 11.84. The average annual earnings growth for the past 5 years was very high, 46.1%, and the average earnings growth estimates for the next 5 years (per annum) is 17.39%. In the second quarter of 2012, Entropic performed well with revenue exceeding the high end of the company's revised guided range and better-than-expected underlying profitability. ENTR stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

Entropic Communications, Inc., fabless semiconductor company, designs, develops, and markets system solutions to enable connected home entertainment in the United States and internationally. Its products include integrated circuits and related software associated with home networking solutions based on the Multimedia over Coax Alliance standard; direct broadcast satellite (NYSEARCA:DBS); high-speed broadband access; and silicon tuners. The company was founded in 2001 and is headquartered in San Diego, California.

Chart: Finviz.com

Netgear Inc. (NASDAQ:NTGR)

Netgear has no debt at all and its price to free cash flow for the trailing 12 months is 18.49. The average annual earnings growth estimates for the next 5 years is quite high 20%. The company expects to introduce about 25 new products in the third quarter of 2012, and it expects to benefit from the increased market demand generated by the back to school season. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

NETGEAR, Inc. engages in the design, development, marketing, and sale of networking products. The company offers home networking, storage, and digital media products to connect users with the Internet and their content and devices; networking, storage, and security solutions to commercial businesses; and whole home networking solutions to service providers for sale to their customers. NETGEAR, Inc. was founded in 1996 and is headquartered in San Jose, California.

Chart: Finviz.com

Parametric Technology Corporation (PMTC)

Parametric Technology has low debt (total debt to equity is only 0.16) and its price to free cash flow for the trailing 12 months is 16.1. The average annual earnings growth estimates for the next 5 years is 17.5%. For the fiscal third quarter of 2012, PMTC delivered solid operating results, with Q3 non-GAAP revenue toward the higher end of its guidance range and non-GAAP EPS exceeding the high end of its guidance range. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

Parametric Technology Corporation develops, markets, and supports product lifecycle management (NYSEMKT:PLM) software solutions and services that help companies design products, manage product information, and enhance product development processes worldwide. Its PLM solutions comprise Windchill, an Internet-based content and process management solution for managing data and relationships, processes, and publications; Arbortext, an enterprise solution to manage complex information assets that enhance their customer support and service center information delivery processes. The company was founded in 1985 and is headquartered in Needham, Massachusetts.

Chart: Finviz.com

Zix Corporation (NASDAQ:ZIXI)

Zix Corporation has no debt at all and its price to free cash flow for the trailing 12 months is only 12.15. The average annual earnings growth estimates for the next 5 years is quite high 20%. For the second quarter of 2012, revenue was $10.3 million, an increase of 9.7%, year-over-year, the Company's 14th consecutive quarterly record in revenue. The company also is increasing its investments in new products that will be released in 2013. Among the 4 analysts covering the stock, 1 rates strong buy, and 3 rate buy. ZIXI stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

Zix Corporation provides email encryption solutions in software as a service model in the United States. Its encryption service delivers information in a secure manner and enables the use of Internet-based email for sensitive information exchange primarily in the healthcare, financial services, insurance, and government sectors. Zix Corporation was founded in 1983 and is headquartered in Dallas, Texas.

Chart: Finviz.com

Source: 4 Tech Growth Stocks With Positive Momentum