Growth stocks at a reasonable price are stocks that have a better than average chance of beating the market. Since mid-cap stocks are less-followed by investors it is possible to find among them attractive candidates. A mid-cap stock tends to offer greater growth potential than a large-cap, and also tends to be more volatile than a large-cap stock, but not as volatile as a small-cap stock. Although on average, the highest returns have come from stocks with the lowest market capitalization, this year so far, large-cap stocks have outperformed small-cap and mid-cap stocks.
Indexes Total Returns, Year to Date, are shown in the table below (Data through 10/09/2012):
I have elaborated a screening method, which is looking for mid-cap stocks with good growth prospects selling at attractive prices. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with the following demands:
- The stock is included in the S&P 400 index. S&P Custom Indices Fact Sheet explanation: "Introduced in 1991, the S&P MidCap 400® provides investors with a benchmark for midsized companies. Today, mid caps are being recognized as an independent asset class, with risk/reward profiles that differ considerably from both large caps and small caps. The S&P MidCap 400 covers over 7% of the U.S. equities market, and is part of a series 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 10%.
- 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 0.6.
- 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 6 following stocks:
The Cooper Companies Inc. (COO)
The Cooper Companies, Inc. engages in the provision of medical devices for healthcare professionals worldwide.
The Cooper Companies Inc. has a very low debt (total debt to equity is only 0.23) and the company has a forward P/E of 16.5 and a low PEG ratio of 1.33. The average annual earnings growth estimates for the next 5 years is quite high at 15.1%. Among the 12 analysts covering the stock, seven rate it a strong buy, two rate buy, two rate hold and one rated underperform. During the fiscal third quarter ended July 31, 2012, the company repurchased approximately 321,000 shares for $25.0 million. For the fiscal year-to-date the company has repurchased 984,000 shares for $71.1 million. All these factors make the stock quite attractive.
Compuware Corporation (CPWR)
Compuware provides software, expertise and best practices to ensure applications work well and deliver business value. Compuware solutions optimize application performance across the Enterprise and the Internet for leading organizations around the world.
Compuware has a very low debt (total debt to equity is only 0.03) and the average annual earnings growth estimates for the next 5 years is 11.25%. Among the six analysts covering the stock, one rated it a strong buy and five rate it a buy. On July 24, 2012, Compuware CEO Bob Paul explained that driven by technology mega-trends like mobile, cloud and big data analytics, Compuware's growth engines continue to rapidly increase revenues. The CPWR stock seems to be a good investment right now
Hologic Inc. (HOLX)
Hologic, Inc. is a leading developer, manufacturer and supplier of premium diagnostics products, medical imaging systems and surgical products. The company operates four core business units focused on breast health, diagnostics, GYN surgical, and skeletal health.
Hologic has a low debt (total debt to equity is only 0.51) and the company has a relatively low forward P/E of 13 and a low PEG ratio of 1.28. The average annual earnings growth estimates for the next 5 years is 12.96%. Among the 22 analysts covering the stock, eleven rate it a strong buy, eight rate it a buy and only three rate a hold. The company says that they are meeting growing global demand in their markets. All these factors make the stock quite attractive.
Kirby Corporation (KEX)
Kirby Corporation, through its subsidiaries, provides marine transportation and diesel engine services primarily in the United States. Its Marine Transportation segment provides transportation services for the inland and coastal markets.
Kirby Corporation has a low debt (total debt to equity is 0.52) and the company has a relatively low forward P/E of 14 and a PEG ratio of 1.42. The average annual earnings growth estimates for the next 5 years is 10.85%. Among the 15 analysts covering the stock, six rate it a strong buy, seven rate it a buy and only two rate it a hold. The KEX stock seems to be a good investment right now.
Mentor Graphics Corp. (MENT)
Mentor Graphics is a leading supplier of products and services used by companies worldwide in the design of the electronic content of their products. The company says that they are unique in providing solutions for hardware components.
Mentor Graphics has a low debt (total debt to equity is only 0.25) and the company has a very low forward P/E of 9.79 and a very low PEG ratio of 0.91. The average annual earnings growth estimates for the next 5 years is quite high at 15%. Among the seven analysts covering the stock, five rate it a strong buy, one rates it a buy and one rates it a hold. The MENT stock seems to be a good investment right now.
Towers Watson & Co. (TW)
Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, financial and risk management.
Towers Watson has a very low debt (total debt to equity is only 0.19) and the company has a very low forward P/E of 9.55 and a low PEG ratio of 1.34. The average annual earnings growth estimates for the next 5 years is 11.4%. Among the ten analysts covering the stock, four rate it a strong buy, four rate it a buy and only two rate it a hold. The TW stock seems to be a good investment right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.