Historical studies have shown that on average, the highest returns have come from stocks with the lowest market capitalization, but there have been long periods when large-cap stocks have outperformed smaller stocks. This year so far, large-cap stocks have outperformed small-cap and mid-cap stocks by a significant margin.
Indexes Total Returns, Year to Date, are shown in the table below (Data through 10/09/2012):
In looking for future winners among large caps, I searched for stocks with strong growth prospects. Those stocks would have to show stable financial conditions and generate positive free cash flow. I looked also for companies where the average analysts' recommendation is buy or better.
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 S&P 500 index. S&P Custom Indices Fact Sheet explanation: "Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500® focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. S&P 500 is part of aseries of S&P U.S. indices that can be used as building blocks for portfolio construction."
- Earnings growth estimates for the next 5 years (per annum) is greater than 11%.
- Price to free cash flow is positive, (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 0.5.
- Average analyst recommendations are very bullish (less than 1.8).
After running this screen on October 10, 2012 before the market open, I obtained as results the 5 following stocks:
Broadcom Corp. (BRCM)
Broadcom Corporation is a global leader and innovator in semiconductor solutions for wired and wireless communications. The company says that its products seamlessly deliver voice, video, data and multimedia connectivity in the home, office and mobile environments.
Broadcom has a very low debt (total debt to equity is only 0.17) and the company has a low forward P/E of 10.81 and a PEG ratio of 1.57. The average annual earnings growth for the past 5 years has been very high at 20.64% and the average annual earnings growth estimates for the next 5 years is also quite high at 15.47%. Broadcom pays a dividend, and the forward annual dividend yield is 1.21%. Among the 47 analysts covering the stock, 15 rate strong buy, 24 rate buy, 6 rate hold and 2 rate underperform. All these factors make the stock quite attractive .
LSI Corporation (LSI)
LSI Corporation designs, develops, and markets storage and networking semiconductors worldwide. It offers integrated circuits for hard disk and tape drive solutions, which are used to store and retrieve data in personal computers, corporate network servers, archive/back-up devices, and consumer electronics products.
LSI Corporation has no debt at all and the company has a very low forward P/E of 8.55 and a low PEG ratio of 1.39. The average annual earnings growth estimates for the next 5 years is quite high at 16%. Among the 17 analysts covering the stock, five rate strong buy, nine rate buy and three rate hold. The LSI stock seems to be a good investment right now.
National Oilwell Varco, Inc. (NOV)
National Oilwell Varco is a worldwide leader in the design, manufacture and sale of equipment and components used in oil and gas drilling and production, the provision of oilfield inspection and other services, and supply chain integration services to the upstream oil and gas industry.
National Oilwell Varco has a very low debt (total debt to equity is only 0.08) and the company has a low forward P/E of 11.64 and a low PEG ratio of 1.07. The average annual earnings growth for the past 5 years has been very high at 19.44% and the average annual earnings growth estimates for the next 5 years is also quite high at 13.75%. Among the 28 analysts covering the stock, 10 rate strong buy, 16 rate buy and only two rate hold. The NOV stock seems to be a good investment right now.
Schlumberger Limited (SLB)
Schlumberger Limited supplies technology, integrated project management, and information solutions to the oil and gas exploration and production industries worldwide. The company says that it is the leading oilfield services provider, trusted to deliver superior results and improved E&P performance for oil and gas companies around the world.
Schlumberger has a low debt (total debt to equity is only 0.32) and the company has a relatively low forward P/E of 14.2 and a low PEG ratio of 1.14. The average annual earnings growth estimates for the next 5 years is 15.78%. Schlumberger pays a dividend, and the forward annual dividend yield is 1.53%. Among the 33 analysts covering the stock, 11 rate strong buy, 20 rate buy and only two rate hold. The SLB stock seems to be a good investment right now.
Thermo Fisher Scientific, Inc. (TMO)
Thermo Fisher Scientific, Inc. provides analytical instruments, equipment, reagents and consumables, software and services for research, manufacture, analysis, discovery and diagnostics. Its products are used by customers in markets, including healthcare and diagnostics; pharmaceutical and biotechnology, academic and government, and industrial and applied markets.
Thermo Fisher Scientific has a low debt (total debt to equity is only 0.43) and the company has a low forward P/E of 11.03 and its price to free cash flow is quite low at 13.34. The average annual earnings growth for the past 5 years has been very high at 25.33% and the average annual earnings growth estimates for the next 5 years is 11.28%. Among the 20 analysts covering the stock, eight rate strong buy, eight rate buy and four rates hold. The TMO stock seems to be a good investment right now.