One way to find stocks with a better chance to outperform the market is to look for a certain type of stock with above average growth prospects. Those stocks would have to show stable financial conditions, low debt and generate positive 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 11%.
- Total debt to equity is less than 0.25.
- 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 screener to perform the search. After running this screen on October 05, 2012 before the market open, I obtained as results the 4 following stocks:
Church & Dwight Co. Inc. (CHD)
Church & Dwight is one of the fastest growing Consumer Packaged Goods companies. The company is a leader in the Household Consumer Products and Personal Care industry. Church & Dwight was founded in 1846 and is headquartered in Princeton, New Jersey.
Church & Dwight has very low debt (total debt to equity is only 0.14). The average annual earnings growth for the past 5 years has been 15.42% and the average annual earnings growth estimates for the next 5 years is 11.3%. Church & Dwight pays a dividend, and the forward annual dividend yield is 1.76%. In the second quarter of 2012, the company purchased 2.2 million shares of its common stock at an aggregate cost of approximately $110 million. This brings the six month total to 4.1 million shares at an aggregate cost of approximately $200 million. All these factors make the stock quite attractive.
Edwards Lifesciences Corp. (EW)
Edwards Lifesciences is the global leader in the science of heart valves and hemodynamic monitoring. The company partners with clinicians to develop innovative technologies in the areas of structural heart disease and critical care monitoring that enable them to save and enhance lives. Edwards Lifesciences was founded in 1999 and is headquartered in Irvine, California.
Edwards Lifesciences has very low debt (total debt to equity is only 0.13). The average annual earnings growth for the past 5 years has been 13.5% and the average annual earnings growth estimates for the next 5 years is very high at 27.9%. During the second quarter of 2012, the company repurchased approximately 627,000 shares of common stock for $52.9 million. The EW stock seems to be a good investment right now.
Gildan Activewear Inc. (GIL)
Gildan Activewear engages in the manufacture and sale of apparel products primarily in the United States, Canada, and Europe. It sells T-shirts, fleece, and sport shirts to wholesale distributors under the Gildan brand name. Gildan Activewear was founded in 1984 and is headquartered in Montreal, Canada.
Gildan Activewear has low debt (total debt to equity is only 0.23). The average annual earnings growth for the past 5 years has been 16.8% and the average annual earnings growth estimates for the next 5 years is very high at 20.25%. GIL pays a dividend, and the forward annual dividend yield is 0.91%. Among the 14 analysts covering the stock, 5 rate strong buy, 6 rate buy and only 3 rate hold. The GIL stock seems to be a good investment right now.
XO Group Inc. (XOXO)
XO Group Inc., a media and technology company, provides multiplatform media services to the wedding, newlywed, and pregnancy markets in the United States. The company was founded in 1996 and is headquartered in New York, New York.
XO Group has no debt at all and its price to free cash flow for the trailing 12 months is only 10.88. The average annual earnings growth estimates for the next 5 years is quite high at 18.5%. In the second quarter of 2012, XO Group finished the remainder of its authorized stock repurchase, buying 0.7 million shares of its common stock in the open market for an aggregate purchase price of $6.2 million. Since starting repurchases under the program in the first quarter of 2011, XO Group has repurchased 9.6 million shares, or 27.9% of shares outstanding at the end of December 31, 2010. The XOXO stock seems to be a good investment right now.