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. 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:
- 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 10%.
- 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).
- Total debt to equity is less than 0.5.
- 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 27, 2012 before the market open, I obtained as results the following three stocks:
Click to enlarge
Check Point Software Technologies Ltd. (NASDAQ:CHKP)
Check Point is a software company that develops, market, and supports a range of software. The company combined hardware and software products and services for information technology security worldwide. Check Point Software Technologies Ltd. was founded in 1993 and is headquartered in Tel Aviv, Israel.
Check Point has no debt at all and its price to free cash flow for the trailing 12 months is 12.67. The average annual earnings growth for the past five years has been 16.71% and the average annual earnings growth estimates for the next five years is 11.92%. Among the 30 analysts covering the stock, 8 rate it a strong buy, 13 rate it a buy and 9 rate it a hold.
On July 18, 2012, Check Point announced that the board of directors authorized the expansion of the on-going share repurchase program up to $1 billion. Under the expanded plan, Check Point is authorized to repurchase up to $1 billion of its outstanding shares during the next two years. All these factors make the stock quite attractive.
Pozen, Inc. (NASDAQ:POZN)
Pozen, Inc., headquartered in Chapel Hill, NC, is a progressive pharmaceutical company committed to addressing unmet medical needs and providing affordable medicines to patients and physicians. Since its founding in 1996, Pozen has successfully created novel pharmacologic agents primarily for pain and pain-related conditions by combining existing drug therapies that result in superior patient outcomes.
Pozen has no debt at all and its price to free cash flow for the trailing 12 months is very low only 4.55. The average annual earnings growth for the past five years has been very high at 74% and the average annual earnings growth estimates for the next five years is also high at 30%.
On August 29, 2012, Pozen presented Phase 1 data from a study of PA32540, a novel coordinated-delivery tablet of enteric-coated aspirin (325 mg) and immediate-release omeprazole (40 mg). The data showed positive results in a Phase 1 study. All these factors make the stock quite attractive.
UnitedHealth Group Inc. (NYSE:UNH)
UnitedHealth Group is a leading health care company, serving more than 75 million people worldwide. Its family of companies touches nearly every aspect of health care, helping people live healthier lives. The company was founded in 1974 and is based in Minnetonka, Minnesota, with an additional office in New Delhi, India.
Unitedhealth has low debt (total debt to equity is 0.43) and its price to free cash flow for the trailing 12 months is very low at only 6.72. The average annual earnings growth estimates for the next five years are at 10.73%. Among the 24 analysts covering the stock, 9 rate it a strong buy, 10 rate it a buy and only 5 rate it a hold.
On September 11, 2012, it was announced that Unitedhealth had made its third appearance on the InformationWeek 500, an annual listing of the nation's most innovative users of business technology. The UNH stock seems to be a good investment right now.