In looking for future tech stock winners, I search for companies with above average growth prospects. The stocks I look for have to show stable financial conditions and generate positive free cash flow. However, in order to find the proper moment for an opening position, a technical analysis with a momentum indicator can be of great assistance for investors.
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 11%.
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. The forward P/E is less than 16.
5. The 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 25, 2012, before the market open, I obtained as results the 5 following stocks (click to enlarge images):
Ancestry.com Inc. (NASDAQ:ACOM)
Ancestry.com Inc. operates as an online family history resource for subscribers worldwide.
Ancestry.com has no debt at all and its price to free cash flow for the trailing 12 months is very low at 11.63. The average annual earnings growth for the past five years has been very high at 43.62% and the average annual earnings growth estimates for the next five years is 14.20%. On October 22, 2012, the Company reported that a company owned by the Permira funds and co-investors entered into a definitive merger agreement to acquire Ancestry.com for $32.00 per share in cash in a transaction valued at $1.6 billion. The transaction, which is subject to the approval of holders of a majority of the outstanding shares of Ancestry.com common stock and other customary closing conditions, is expected to close in early 2013. This merger guarantees investors at least a 1.6% gain in a few months.
Fair Isaac Corp. (NYSE:FICO)
Fair Isaac Corporation provides analytic, software, and data management products and services to automate, improve, and connect decisions for businesses worldwide.
Fair Isaac has a quite low forward P/E of 14.85 and a very low PEG ratio of 0.95. The price to free cash flow for the trailing 12 months is very low at 13.74 and the average annual earnings growth estimates for the next 5 years is quite high at 18.10%. On October 10, 2012, the company announced that it has been named one of the Top 25 Global Financial Technology Companies in FinTech, a special report from American Banker, Bank Technology News and IDC Financial Insights. All these factors make the stock quite attractive.
Polycom, Inc. (NASDAQ:PLCM)
Polycom, Inc. provides standards-based unified communications solutions; and telepresence, video, voice, and infrastructure solutions based on open standards.
Polycom has no debt at all and its price to free cash flow for the trailing 12 months is very low at 10.60. The forward P/E is very low at 14.11 and the PEG ratio is 1.63. The average annual earnings growth estimates for the next 5 years is 12.70%. On October 23, 2012, Polycom reported Q3 results that slightly exceeded Street estimates. The company noted that it saw strength in North American business in the quarter. The PLCM stock looks quite attractive.
Rovi Corporation (NASDAQ:ROVI)
Rovi Corporation provides digital entertainment technology solutions for the discovery and management of entertainment content.
Rovi Corporation has a very low forward P/E of 6.90 and a very low PEG ratio of 0.70. The price to free cash flow for the trailing 12 months is also very low at 8.22 and the average annual earnings growth estimates for the next 5 years is 11.40%. ROVI stocks are selling below book value (P/B at 0.89). On September 25, 2012, an officer purchased 15,000 company's shares at $15.00 total of $225,000. All these factors make the stock quite attractive.
Yahoo! Inc. (YHOO)
Yahoo! Inc. operates as a digital media company that delivers personalized digital content and experiences worldwide.
Yahoo has no debt at all and it has a very low forward P/E of 14.39 and a PEG ratio of 1.34. The average annual earnings growth estimates for the next 5 years is 13.87. During the last 6 months insiders have purchased 2,564,000 company's shares and have sold only 280,686 shares. On October 22, 2012, Yahoo reported Q3 results that exceeded Street estimates; Q3 EPS of $0.35 beat by $0.09 and revenue of $1.09B beat by $10M. The YHOO stock looks quite attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.