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 and pay dividends, 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 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).
- Total debt to equity is less than 0.7.
- Forward Annual Dividend Yield is greater than 1.40%.
- 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 28, 2012 before the market open, I obtained as results the 3 following stocks:
Core-Mark Holding Company, Inc. (CORE)
Core-Mark is one of the largest and most valued marketers of fresh and broad-line supply solutions to the convenience retail industry. Offering a full range of products, marketing programs and technology solutions to over 29,000 locations across North America, Core-Mark services traditional convenience stores, drug, grocery and specialty stores and other small format retailers that sell consumer packaged goods. Core-Mark Holding Company, Inc. was founded in 1888 and its headquarters is in South San Francisco, California.
Core-Mark has low debt (total debt to equity is only 0.18) and its price to free cash flow for the trailing 12 months is 16.56. The average annual earnings growth estimates for the next 5 years is 14%. The forward annual dividend yield is 1.41% and all 3 analysts covering the stock rate it a strong buy. On August 8, 2012, the company reiterates its 2012 annual guidance of $9.0 billion net sales, adjusted EBITDA in the range of $102 million to $105 million and diluted earnings per share between $2.75 and $2.90. CORE stock seems to be a good investment right now.
Rockville Financial Inc. (RCKB)
Rockville Financial, Inc. operates as the holding company for Rockville Bank that provides a range of banking services to consumer and commercial customers. The company offers deposit instruments, including checking, savings, money market savings accounts, negotiable order of withdrawal accounts, and fixed-rate time deposits. The company was founded in 1858 and is based in Rockville, Connecticut.
Rockville Financial has no debt at all and its price to free cash flow for the trailing 12 months is 18.52. The average annual earnings growth estimates for the next 5 years is 10%. The forward annual dividend yield is quite high 2.96%. As of June 30, 2012, the company had repurchased 1,328,379 shares at an average cost of $11.61 per share. The company may repurchase up to 2,951,250 shares, or 10% of the outstanding shares at the time the plan was approved. RCKB stock seems to be a good investment right now.
United Financial Bancorp, Inc. (UBNK)
United Financial Bancorp, Inc. is the holding company of United Bank, a federally chartered savings bank headquartered at 95 Elm Street in West Springfield, Massachusetts. United Bank operates 16 branch offices and 2 express drive up branches located throughout Western Massachusetts and six full service branch locations in Worcester County. The company was founded in 1882 and its headquarters is in West Springfield, Massachusetts.
United Financial Bancorp has relatively low debt (total debt to equity is 0.67) and its price to free cash flow for the trailing 12 months is 17.3. The average annual earnings growth estimates for the next 5 years is 15%. The forward annual dividend yield is quite high 2.76%. On July 26, 2012, the company announced that it continues to maintain excellent asset quality metrics, which compare favorably to industry averages and those of its peers and a healthy balance sheet with solid capital and liquidity positions. All these factors make the stock quite attractive.