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Arie Goren, Portfolio123 (475 clicks)
Long only, value, research analyst, dividend investing
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Growth investors believe in buying stocks with above-average earnings growth no matter what the price, but it is possible to find growth stocks that are not too expensive at the moment. In looking for future winners in this category, I searched for stocks with strong growth prospects. These stocks would have to show stable financial conditions and generate positive free cash flow. However, in order to find the proper moment to open a position, a technical analysis with a momentum indicator can be of great assistance for investors.

I have delineated 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:

  1. 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."

  2. Earnings growth estimates for the next 5 years (per annum) is greater than 10%.

  3. 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).

  4. Total debt to equity is less than 0.7.

  5. 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 08, 2012 before the market open, I obtained as results the following six stocks:

(click to enlarge)

AmSurg Corp. (AMSG)

AmSurg is the nationally recognized leader in the development, management and operation of outpatient surgery centers. AmSurg is partnering with more than 1,500 physicians at more than 220 outpatient surgery centers across the United States. The company says that its surgery centers provide high quality, low cost surgical services with superior patient satisfaction.

AmSurg has low debt (total debt to equity is 0.65) and its price to free cash flow for the trailing 12 months is very low at 3.61. The average annual earnings growth estimates for the next 5 years is 11.3%. On July 24, 2012, AmSurg reported financial results for its 2012 second quarter, Christopher A. Holden, President and Chief Executive Officer, remarked:

AmSurg's second-quarter results represent the third consecutive quarter in which our revenues have grown in excess of 20% on a comparable-quarter basis. For the latest quarter, this growth was driven by a 3% increase in same-center revenue, as well as an expansion in the number of centers in operation to 228 at the quarter's end from 206 centers at the end of the second quarter last year. Our centers produced a 14% increase in procedures for the latest quarter compared with the second quarter last year, and revenue per procedure increased 8%, consistent with the growth in multi-specialty centers as a percentage of our center mix since the second quarter last year.

AMSG stock seems to be a good investment right now. (click to enlarge)

Chart: finviz.com

The Hartford Financial Services Group, Inc. (HIG)

The Hartford Financial Services provides insurance and financial services primarily in the United States and Japan. The company's Property & Casualty Commercial segment offers workers' compensation, property, automobile, marine, livestock liability, and umbrella coverages, as well as customized insurance products and risk management services, including professional liability, fidelity, surety, and specialty casualty coverages.

Hartford Financial Services has low debt (total debt to equity is only 0.34) and its price to free cash flow for the trailing 12 months is very low at 3.97. The average annual earnings growth estimates for the next 5 years is 12.1%. The company has a very low forward P/E of 6.07 and a very low PEG ratio of 0.48. HIG pays a dividend, and the forward annual dividend yield is 1.89%. Insiders have been buying the stock during the last months. All these factors make the stock quite attractive.

(click to enlarge)

Chart: finviz.com

LeapFrog Enterprises Inc. (LF)

LeapFrog Enterprises is an education innovator and leading developer of educational entertainment for children. The company says that its award-winning product portfolio is designed to help every child achieve his or her potential by delivering best-in-class curriculum through engaging content, age-appropriate technology-based platforms, and toys.

LeapFrog Enterprises has no debt at all and its price to free cash flow for the trailing 12 months is quite low at 9.17. The average annual earnings growth estimates for the next 5 years is very high at 20%. The company has quite low forward P/E of 11.23 and a very low PEG ratio of 0.76. All these factors make the stock quite attractive.

(click to enlarge)

Chart: finviz.com

McKesson Corporation (MCK)

McKesson Corporation delivers pharmaceuticals, medical supplies, and health care information technologies to the healthcare industry primarily in the United States. The company says that it is dedicated to delivering the vital medicines, medical supplies and information technologies that enable the health care industry to provide patients better, safer care.

McKesson has low debt (total debt to equity is 0.50) and its price to free cash flow for the trailing 12 months is 14.14. The average annual earnings growth estimates for the next 5 years is 12.48%. The company has quite low forward P/E of 11.16 and a PEG ratio of 1.18. McKesson pays a dividend, and the forward annual dividend yield is 0.89%. Among the 18 analysts covering the stock, four rate strong buy, nine rate buy and five rate hold.

(click to enlarge)

Chart: finviz.com

PVH Corp. (PVH)

PVH Corp. operates as an apparel company in the United States, Canada, Europe, and internationally. The company designs, sources, and markets sportswear, footwear, athletic apparel, underwear, robes, sleepwear, eyewear, sunwear, watches, handbags, men's tailored clothing, men's dress furnishings, socks, small leather goods, fragrances, home and bedding products, bathroom accessories, and luggage; and jeanswear, bags, accessories, jewelry, watches, home furnishings, hosiery, women's performance apparel, dress shirts, and neckwear.

PVH Corp has low debt (total debt to equity is 0.67) and its price to free cash flow for the trailing 12 months is 18.29. The average annual earnings growth estimates for the next 5 years is 15.45%. Among the 18 analysts covering the stock, six rate strong buy, six rate buy and six rate hold.

(click to enlarge)

Chart: finviz.com

WellPoint Inc. (WLP)

WellPoint operates as a health benefits company in the United States. WellPoint is one of the nation's largest health benefits companies, with nearly 34 million members in its affiliated health plans and approximately 65 million individuals served through its subsidiaries.

WellPoint has low debt (total debt to equity is only 0.47) and its price to free cash flow for the trailing 12 months is quite low at 8.54. The average annual earnings growth estimates for the next 5 years is 10.1%. The company has a very low forward P/E of 7.65 and a very low PEG ratio of 0.83. WellPoint pays a dividend, and the forward annual dividend yield is 1.88%. All these factors make the stock quite attractive.

(click to enlarge)

Chart: finviz.com

Source: 6 Growth Stocks With Positive Momentum