I have searched for very profitable companies with strong growth prospects that technically are showing positive momentum. 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 that all stocks 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%.
- Price to free cash flow is less than 12, (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).
- The PEG ratio is less than 1.1.
- 10-day moving average is above 20-day moving average, and the crossover happened 3 days or less prior to the start of the screen (Short term momentum indicator).
After running this screen on October 12, 2012 before the market open, I obtained as results the 4 following stocks:
|Company||Symbol||Last price||Market Cap ($billions)||Trailing P/E||Forward P/E||PEG Ratio|
|Advance Auto Parts Inc.||AAP||68.49||5.02||12.59||11.38||1.07|
|Liberty Interactive Corporation||LINTA||19.30||11.55||17.71||14.51||0.98|
|Nu Skin Enterprises Inc.||NUS||41.78||2.50||13.22||11.38||0.94|
Advance Auto Parts Inc.
Advance Auto Parts, Inc. is a leading automotive aftermarket retailer in the United States, based on sales and store count.
Advance Auto Parts has a low forward P/E of 11.38 and a low PEG ratio of 1.07. The average annual earnings growth for the past 5 years has been high at 18.79% and the average annual earnings growth estimates for the next 5 years is 11.78%. The price to free cash flow for the trailing 12 months is quite low at 10.24 and the price to sales is also very low at 0.81. The company pays a dividend, and the forward annual dividend yield is 0.35%. During the second quarter of 2012, the company opened 10 stores, including three Autopart International stores. Year-to-date, the company opened 35 stores, including six Autopart International stores. As of July 14, 2012, the company's total store count was 3,692 including 203 Autopart International stores. The company remains on pace to open approximately 120 to 140 stores in fiscal 2012. This rate of opening new stores is expected to contribute substantially to the growth of the company. All these factors make the stock quite attractive.
Liberty Interactive Corporation
Liberty Interactive Corporation, through its subsidiaries, engages in video and on-line commerce businesses in North America, Europe, and Asia.
Liberty Interactive has a forward P/E of 14.51 and a very low PEG ratio of 0.98. The average annual earnings growth estimates for the next 5 years is quite high at 18.15%. The price to free cash flow for the trailing 12 months is very low at 9.22 and the price to sales is 1.17. The company repurchased $257 million of its stock from May 1, 2012 through June 29, 2012, which demonstrate its confidence in Liberty's strong fundamentals. The LINTA stock seems to be a good investment right now.
Methanex is the world's largest supplier of methanol to major international markets in North America, Asia Pacific, Europe and Latin America.
Methanex has a very low forward P/E of 9.87 and a very low PEG ratio of 0.32. The average annual earnings growth estimates for the next 5 years is very high at 46%. The price to free cash flow for the trailing 12 months is quite low at 11.32 and the price to sales is also low at 1.01. The company pays a dividend, and the forward annual dividend yield is high at 2.52%. Reporting its second-quarter results, the company said that overall methanol demand has remained good and the pricing environment has been relatively stable, despite some demand softness in certain derivatives. All these factors make the stock quite attractive.
Nu Skin Enterprises Inc.
Nu Skin Enterprises is a direct-selling company that distributes more than 200 premium-quality anti-aging products in both the personal care and nutritional supplements categories.
Nu Skin Enterprises has a low forward P/E of 11.38 and a very low PEG ratio of 0.94. The average annual earnings growth for the past 5 years has been very high at 38.54% and the average annual earnings growth estimates for the next 5 years is 14.1%. The price to free cash flow for the trailing 12 months is quite low at 11.82 and the price to sales is 1.26. The company pays a dividend, and the forward annual dividend yield is 1.91%. On September 21, 2012, the company announced initial details of its five-year business development plan for mainland China. The plan includes tripling the number of stores and sales support centers by 2017 and expanding its direct selling coverage and distribution model to generate higher levels of market penetration. 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.