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Arie Goren, Portfolio123 (475 clicks)
Long only, value, research analyst, dividend investing
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One way to find stocks with a better chance to outperform the market is to look for certain types of stocks with high growth prospects. Such stocks would have to reflect stable financial positions and generate strong free cash flow, without being too expensive at the time of selection. 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 10%.
  3. Price to free cash flow is less than 13, (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 0.5.
  5. The PEG ratio is less than 1.0.
  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 22, 2012, I obtained, as my results, the following three stocks:

Click to enlarge

Aetna, Inc. (AET)

Aetna has low debt (total debt to equity is only 0.46) and its price to free cash flow for the trailing 12 months is very low 6.29. The average annual earnings growth estimates for the next 5 years is 10.35%. The company is paying dividends, the forward annual dividend yield is 1.80%.

Based on its second quarter results, Aetna is increasing its full-year 2012 operating earnings guidance to a range of $5.00 to $5.10 per share. The company has generated returns for its shareholders with strong revenue growth, solid margins and disciplined capital deployment. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

Aetna Inc. operates as a diversified health care benefits company in the United States. The company operates in three segments: Health Care, Group Insurance, and Large Case Pensions. The Health Care segment provides medical, pharmacy benefit management, dental, behavioral health, and vision plans. This segment also provides Medicare and Medicaid products and services; and specialty products, such as health information exchange technology services, medical management and data analytics services, medical stop loss insurance, and products that offer access in its provider networks select markets. Aetna Inc. was founded in 1982 and is headquartered in Hartford, Connecticut.

Chart: finviz.com

Big Lots, Inc. (BIG)

Big Lots has low debt (total debt to equity is only 0.35) and its price to free cash flow for the trailing 12 months is 12.1. The average annual earnings growth estimates for the next 5 years is 11.35%. During the second quarter of 2012, the company Invested $149 million to repurchase 4 million shares, or 6% of its outstanding shares, as part of its $200 million share repurchase program announced in May 2012. All these factors make the stock quite attractive.

Business description from Yahoo Finance (see here):

Big Lots, Inc., through its subsidiaries, operates as a broadline closeout retailer in the United States and Canada. The company offers products under various merchandising categories, such as consumables, including food, health and beauty, plastics, paper, chemical, and pet departments; furniture category comprising upholstery, mattresses, ready-to-assemble, and case goods departments; home category that consists of domestics, stationery, and home decorative departments; and seasonal category, which includes the lawn and garden, Christmas, summer, and other holiday departments. Big Lots, Inc. was founded in 1967 and is based in Columbus, Ohio.

Chart: finviz.com

SciClone Pharmaceuticals, Inc. (SCLN)

SciClone Pharmaceuticals has almost no debt (total debt to equity is only 0.02) and its price to free cash flow for the trailing 12 months is very low at only 7.64. The average annual earnings growth estimates for the next five years is 14.1%. At June 30, 2012, cash and investments totaled $81.9 million, compared with $67.0 million at December 31, 2011. The increase in SciClone's cash balance was primarily due to the cash generated by the Company's commercial operations, partially offset by $8.9 million used in the six months ended June 30, 2012 for the repurchase of SciClone stock. SCLN stock seems to be a good investment right now

Business description from Yahoo Finance (see here):

SciClone Pharmaceuticals, Inc. provides therapies for the treatment of oncology, infectious diseases, cardiovascular, urological, respiratory, and central nervous system disorders in the People's Republic of China and internationally. Its principal product is ZADAXIN, which is used for the treatment of hepatitis B and hepatitis C viruses, and certain cancers, as well as for use as a vaccine adjuvant, and as a chemotherapy adjuvant for cancer patients with weakened immune systems. ZADAXIN has approval in approximately 30 countries, which include China, the Pacific Rim, Latin America, eastern Europe, and the Middle East. SciClone Pharmaceuticals, Inc. was founded in 1989 and is headquartered in Foster City, California.

Chart: finviz.com

Source: 3 Low PEG Stocks With Positive Momentum