In looking for future winners among large caps, I searched for stocks with above-average growth prospects. For me, these stocks would have to exhibit stable financial conditions and generate positive 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 that 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 1000 index. Russell Investment explanation: "The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.The Russell 1000 Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected."
- Earnings growth estimates for the next five years (per annum) is greater than 10%.
- Long term debt to equity is less than 0.9.
- 10-day moving average is above 20-day moving average, and the crossover 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 29, 2012, I obtained as results the following five stocks:
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Cardinal Health Inc. (CAH)
Headquartered in Dublin, Ohio, Cardinal Health, is a health care services company that improves the cost-effectiveness of healthcare. As the business behind healthcare, Cardinal Health helps pharmacies, hospitals, ambulatory surgery centers and physician offices focus on patient care while reducing costs, enhancing efficiency and improving quality.
Cardinal Health has relatively low debt (total debt to equity is 0.46) and the PEG ratio is 1.19. The average annual earnings growth for the next five years (per annum) is 10.7% and the forward annual dividend yield is quite high at 2.44%. On August 2, 2012, the company announced that its fiscal 2012 was another strong year, meeting virtually all of its financial goals, including revenues, margin growth, operating earnings, EPS and cash flow. The CAH stock seems to be a good investment right now.
Dollar Tree, Inc. (DLTR)
Headquartered in Chesapeake, VA, Dollar Tree is the largest and most successful single-price- point retailer in the country, operating thousands of stores in all 48 contiguous states and nine distribution centers.
Dollar Tree has very low debt (total debt to equity is only 0.17) and the PEG ratio is 1.29. The average annual earnings growth for the next five years (per annum) is quite high at 16.7%. During the second quarter of 2012, the company repurchased 1.6 million shares for $80.9 million. The company has $1.1 billion remaining on its share repurchase authorization. All these factors make the stock quite attractive.
Humana Inc. (HUM)
Humana Inc. operates as a health care company that offers a range of insurance products and health and wellness services that incorporate an integrated approach to lifelong well-being. The company was founded in 1961 and is headquartered in Louisville, Kentucky.
Humana has low debt (total debt to equity is only 0.22) and its price to free cash flow for the trailing 12 months is very low at only 3.14. The average annual earnings growth for the past five years has been very high at 23.85% and the average annual earnings growth estimates for the next five years is 10.29%. The PEG ratio is very low at 0.91 and the forward annual dividend yield is 1.48%. The HUM stock seems to be a good investment right now.
Kraft Foods Inc. (KFT)
Kraft Foods is the second largest food company in the world, with annual revenues of more than $54 billion. Together with its subsidiaries, manufactures and markets packaged food products worldwide. Kraft Foods Inc. was founded in 2000 and is based in Northfield, Illinois.
Kraft Foods has relatively low debt (total debt to equity is 0.84) and its average annual earnings growth for the next five years is 10.7%. The forward annual dividend yield is quite high at 2.81%. Among the 19 analysts covering the stock, 7 rate it a strong buy, 9 rate it a buy and only 3 rate it a hold. All these factors make the stock quite attractive.
PRECISION CASTPARTS CORP (PCP)
Precision Castparts Corp is a worldwide, diversified manufacturer of complex metal components and products, and is the market leader in manufacturing large, complex structural investment castings, airfoil castings, and forged components used in jet aircraft engines and industrial gas turbines. Precision Castparts Corp was founded in 1949 and is headquartered in Portland, Oregon.
Precision Castparts has almost no debt at all (total debt to equity is only 0.03) and the PEG ratio is 1.43. The average annual earnings growth for the next 5 years (per annum) is 12.95%. Among the 23 analysts covering the stock, 7 rate it a strong buy, 9 rate it a buy and 7 rate it a hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.