In looking for future winners among growth stocks, I searched for stocks with above average growth prospects. Those stocks would have to show 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, 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 16, (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).
- 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 October 04, 2012, I obtained as results the 5 following stocks:
|Company||Symbol||Last price||Market Cap ($billions)||Trailing P/E||Forward P/E||PEG Ratio|
|Delta Air Lines Inc.||DAL||10.16||8.59||9.24||4.00||0.26|
|Sykes Enterprises, Incorporated||SYKE||14.39||0.63||14.67||10.57||0.82|
Amgen Inc. (AMGN)
Amgen discovers, develops, manufactures, and delivers innovative human therapeutics. A leader in biotechnology since 1980, Amgen was one of the first companies to realize the new science's promise by bringing safe, effective medicines from lab, to manufacturing plant, to patient. Amgen Inc. was founded in 1980 and is headquartered in Thousand Oaks, California.
Amgen's price to free cash flow for the trailing 12 months is 15.1 and the average annual earnings growth estimates for the next 5 years (per annum) is 11.22%. The PEG ratio is 1.66. Amgen pays dividend, the forward annual dividend yield is 1.66%. During the second quarter of 2012, Amgen repurchased approximately 17 million shares of common stock at a total cost of $1.2 billion at an average price of $69.31. This brings the total shares repurchased under its $10 billion authorized stock repurchase program to 122 million at a total cost of $7.6 billion at an average price of $62.75. All these factors make the stock quite attractive.
Delta Air Lines Inc. (DAL)
Delta Air Lines serves more than 160 million customers each year. Delta was named by Fortune magazine as the most admired airline worldwide in its 2011 World's Most Admired Companies airline industry list, and was named the "Top Tech-Friendly U.S. Airline" by PCWorld magazine for its innovation in technology. With an industry-leading global network, Delta and the Delta Connection® carriers offer service to 341 destinations in 61 countries on six continents. The company was founded in 1924 and is headquartered in Atlanta, Georgia.
Delta's price to free cash flow for the trailing 12 months is quite low and the average annual earnings growth estimates for the next 5 years (per annum) is very high 36%. The PEG ratio is very low 0.26. On October 02, 2012 Delta reported financial and operating performance for September 2012:
Delta continued to have solid revenue performance, with September month unit revenues up 0.5% year-over-year against a very strong performance in September 2011. This result is lower than previous guidance due to slightly lower walk-up traffic as well as incremental capacity due to strong completion factors and charter flying. Forward bookings remain solid for the fourth quarter; based on current demand trends, Delta expects a year over year improvement for October 2012 unit revenues in the low single digits.
The DAL stock seems to be a good investment right now.
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 3.32. 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 0.96 and the forward annual dividend yield is 1.40%. The HUM stock seems to be a good investment right now.
Seagate Technology (STX)
Seagate is the leading provider of hard drives and storage solutions. Seagate offers the industry's broadest portfolio of hard disk drives, solid-state drives and solid-state hybrid drives. In addition, the company offers an extensive line of retail storage products for consumers and small businesses, along with data-recovery services for any brand of hard drive and digital media type. The company was founded in 1979 and is headquartered in Dublin, Ireland.
Seagate has relatively low debt (total debt to equity is 0.82) and its price to free cash flow for the trailing 12 months is very low at only 5.23. The average annual earnings growth for the past five years has been very high at 33% and the average annual earnings growth estimates for the next five years is also quite high 16.4%. Seagate pays dividend, the forward annual dividend yield is very high at 4.26%. All these factors make the stock quite attractive.
Sykes Enterprises, Incorporated (SYKE)
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.
Sykes Enterprises has no debt at all and its price to free cash flow for the trailing 12 months is only 9.99. 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.