I have searched for profitable companies with a very strong growth prospects that do not have any debt at all and that are technically oversold at the moment. Those stocks have a better than average chance of beating the market.
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:
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 20%.
3. 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).
4. Total debt to equity is zero.
5. RSI (14 days) is above 30 and RSI (14 days) was below 30 in one of the last 3 days. (The Relative Strength Index (RSI) is an oscillator that measures current price strength in relation to previous prices. The classic way to interpret RSI is to look for oversold levels below 30 and overbought levels above 70. When the RSI crosses above the oversold line (30) it is considered buy signal).
I used Portfolio123's powerful free screener to perform the search. After running this screen on October 11, 2012 before the market open, I obtained as results the 3 following stocks:
|Company||Symbol||Last price||Market Cap ($millions)||Trailing P/E||Forward P/E||PEG Ratio|
|Acacia Research Corporation||ACTG||23.94||1,190||17.47||12.40||0.46|
|Mercury Computer Systems, Inc.||MRCY||8.53||274||11.37||10.28||0.52|
Acacia Research Corporation (ACTG)
Acacia Research Corporation develops, licenses, and enforces patented technologies in the United States. It assists patent owners with the prosecution and development of their patent portfolios.
Acacia Research has no debt at all and the company has a low forward P/E of 12.40 and a very low PEG ratio of 0.46. The average annual earnings growth for the past 5 years has been very high at 158% and the average annual earnings growth estimates for the next 5 years is also very high at 38%. On October 02, 2012, Acacia Research announced that it has acquired 7 patent portfolios with over 1,900 patents and applications relating to cardiology and vascular device technology from a leading global medical device company. Such a big move should certainly contribute to the impressive growth of the company. All these factors make the stock quite attractive.
CEVA Inc. (CEVA)
CEVA engages in licensing silicon intellectual property for the handsets, mobile broadband, portable, and consumer electronics markets primarily in the United States.
CEVA has no debt at all and the company has a forward P/E of 15.22 and a very low PEG ratio of 0.60. The average annual earnings growth for the past 5 years has been very high at 44.1% and the average annual earnings growth estimates for the next 5 years is also very high at 30.5%. During the second quarter of 2012, the company bought back approximately 670,000 shares of its common stock for an aggregate consideration of approximately $11.3 million. CEVA still has approximately 900,000 shares available for repurchase remaining under its existing buyback program. The company says that the recent buyback activity continues to demonstrate its confidence in CEVA's strong fundamentals. The CEVA stock seems to be a good investment right now.
Mercury Computer Systems, Inc. (MRCY)
Mercury Computer Systems designs, manufactures and markets commercially developed, high-performance, embedded, real-time, digital signal and image processing systems and software for specialized defense and commercial computing markets.
Mercury has no debt at all and its price to free cash flow for the trailing 12 months is quite low at 12.26. The company has a low forward P/E of 10.28 and a very low PEG ratio of 0.52. The average annual earnings growth estimates for the next 5 years is very high at 22%. On August 08, 2012, the company announced the closing of its acquisition of Micronetics, a leading designer and manufacturer of microwave and radio frequency subsystems and components for defense and commercial customers. This acquisition is expected to contribute substantially to the growth of Mercury Computer Systems. All these factors make the stock quite attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.