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One way to find stocks with a better chance to outperform the market is to look for a certain type of stocks with high growth prospects. Those stocks would have to show stable financial conditions and generate strong free cash flow, but cannot be too expensive at the moment.

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 15%.
  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. Total debt to equity is less than 0.4.
  5. 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 19, 2012, I obtained as results the 4 following stocks:

GAIN Capital Holdings, Inc. (NYSE:GCAP)

GAIN Capital has no debt at all and its price to free cash flow for the trailing 12 months is very low 8.68. The average annual earnings growth estimates for the next 5 years is 15%. The company is paying dividends, the forward annual dividend yield is very high 4.18%. During the second quarter of 2012, the company executed on its longer term strategy to grow and diversify its revenue sources through the announced acquisition of Open E Cry, which provides entry into the exchange-traded futures market and increases GAIN's commission-based revenues. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

GAIN Capital Holdings, Inc., through its subsidiaries, provides online trading services worldwide. It specializes in over-the-counter (OTC) markets, including spot foreign exchange and precious metals, as well as contracts-for-difference. The company services retail investors through its FOREX.com brand, which provides access to various OTC financial markets; offers liquidity in 77 OTC markets, including 58 currency pairs, 10 equity indices, and 9 commodities; and acts as a counterparty for customers' transactions. GAIN Capital Holdings, Inc. was founded in 1999 and is headquartered in Bedminster, New Jersey.

Chart: finviz.com

Gardner Denver Inc. (NYSE:GDI)

Gardner Denver has low debt (total debt to equity is only 0.39) and its price to free cash flow for the trailing 12 months is 13.48. The average annual earnings growth estimates for the next 5 years is 15%. The PEG ratio is very low only 0.75. The company is paying dividends, the forward annual dividend yield is 0.32%. During the second quarter of 2012, the company returned over $107 million in cash to shareholders through the repurchase of 1.664 million shares of its common stock and the payment of dividends. GDI stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

Gardner Denver, Inc. designs, manufactures, and markets engineered industrial machinery and related parts and services primarily in North America, Europe, Asia, South America, Africa, and Australia. The company operates in two segments, Industrial Products Group and Engineered Products Group. The Industrial Products Group segment offers rotary screw, reciprocating, and sliding vane air and gas compressors; positive displacement, centrifugal, and side channel blowers; and vacuum pumps for use in manufacturing, transportation and general industry, and original equipment manufacturer (OEM) and engineered system applications.Gardner Denver, Inc. was founded in 1859 and is based in Wayne, Pennsylvania.

Chart: finviz.com

Renewable Energy Group, Inc. (NASDAQ:REGI)

Renewable Energy has low debt (total debt to equity is 0.21) and its price to free cash flow for the trailing 12 months is very low only 5.03. The average annual earnings growth for the past 5 years has been very high 71% and the average annual earnings growth estimates for the next 5 years is 15%. On September 14, 2012, the Environmental Protection Agency established the amount of bio-diesel products required to be included in diesel fuel markets in 2013 at 1.28B gallons, which is up from 1B gallons in 2012, this is a significant positive for Renewable Energy shares. REGI stock seems to be a good investment right now.

Business description from Yahoo Finance (see here):

Renewable Energy Group, Inc. produces and markets biodiesel primarily in the United States and Canada. It is also involved in purchasing and reselling biodiesel and raw material feed stocks produced by third parties; providing toll manufacturing services to third parties; and selling glycerin, free fatty acids, and other co-products of the biodiesel production process. In addition, the company offers biodiesel facility management and operational services to biodiesel production facilities, as well as other clean-tech companies; and construction management and general contractor services for the construction of biodiesel production facilities. Renewable Energy Group, Inc. was founded in 1996 and is headquartered in Ames, Iowa.

Chart: finviz.com

Sykes Enterprises, Incorporated (NASDAQ:SYKE)

Sykes Enterprises has no debt at all and its price to free cash flow for the trailing 12 months is only 9.56. The average annual earnings growth estimates for the next 5 years is quite high 18%. On August 22, 2012, Sykes Enterprises has completed its $150 million acquisition of Alpine Access Inc., a private firm based in Denver that had more than $100 million in revenue in 2011. The Denver Business Journal reports that Alpine, which has 5,000 employees in 41 states, pioneered the use of operators working from home to handle customer calls for clients. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

Sykes Enterprises, Incorporated and its subsidiaries provide outsourced customer contact management solutions and services in the business process outsourcing arena primarily in the United States, Canada, Latin America, Australia, the Asia Pacific Rim, Europe, the Middle East, and Africa. The company's services include customer care services comprising handling product information requests, describing product features, activating customer accounts, resolving complaints, cross-selling/up-selling, handling billing inquiries, changing addresses, claims handling, ordering/reservations, prequalification and warranty management, providing health information, and roadside assistance. The company was founded in 1977 and is headquartered in Tampa, Florida.

Chart: finviz.com

Source: 4 Growth Stocks With Positive Momentum