I want to share one of my favorite screens that I have developed over the years. The goal of what I call my "Rocket" screen is to identify companies that are not widely followed and that are capable of high growth with strong balance sheets and solid profitability. In a strong market, as we appear to be enjoying, these types of stocks can attract increasing investor interest.
Here are the constraints I used:
- Market Cap: $500mm-$10bln
- ROIC > 14%
- Net Debt to Capital < 25%
- # Wall Street Analysts < 8
- Price Momentum: Beating S&P (1 month, 3 months, 6 months)
- Forward PE: > 12 and < 50
- Earnings Estimates for Next Year: > -4%
- LT EPS Growth Rate > 12%
The goal of the search, then, is to find relatively smaller companies without a large Wall Street following that have high return on invested capital, strong balance sheets and solid projected long-term growth. The stocks must have good price momentum, but they also can’t be experiencing large negative earnings revisions. I am typically wary of "growth" stocks with extremely low valuations, so I limited the search to a PE of 13 or higher.
Here is what we get:
Please remember that this screen is just an illustration for identifying stocks to research further. You should do a thorough investigation of any stock before deciding to invest.
Our screen resulted in four different economic sectors with representation. I follow Raven Industries (RAVN) and am familiar with most of the other names. What follows are my initial observations.
True Religion (TRLG) is both a brand and a store, with its designer jeans sold all around the world, including in its own 105 stores. In the most recent quarter, the company opened three stores in the U.S. and four in Europe as it posted 17% sales growth. The stock seems a bit expensive relative to its recent history, but not necessarily compared to its potential. With that said, it has rallied 76% over the past year, so it’s not the bargain that it was. This stock is trading near its all-time high.
Raymond James Financial (RJF) is involved in several different areas, including capital markets, asset management, banking and several others. It recently announced a very large merger, disclosing its intention to buy Morgan Keegan, which could prove to be a transformational acquisition according to management. The company converted to a bank recently too. RJF isn’t too far from its all-time high set in early 2011, which is impressive for a Financial.
Greenhill & Co. (GHL), a small investment bank, had a terrible 2011 as earnings fell sharply, but analysts are expecting record earnings over the next two years according to consensus estimates at ThomsonReuters. Looking more closely at the performance in 2011, the company expanded its clients and grew advisory fees, but it lost money in its merchant banking. With mergers and acquisitions activity starting to pick up again, GHL could be in a good position to reaccelerate its growth.
Emcor (EME) is involved in several aspects of mechanical and electrical construction and engineering, with exposure to both new construction as well as maintenance and repair. Applied Industrial (AIT) distributes industrial parts used in both new construction and maintenance and repair across a wide variety of industries.
RAVN is a very interesting company and is followed by just a single analyst. The largest part of the company is related to GPS used in agriculture, but the company has exposure to energy and construction through its plastic liner business as well as some products related to national security. The stock is trading near a all-time high.
Healthcare Services Group (HCSG), which has a 3.5% dividend yield, provides housekeeping services to 2300 nursing and retirement homes, hospitals and rehabilitation centers. The PE ratio seems a bit high, but the company has a good record of steadily growing earnings.
Cirrus Logic (CRUS) is a semiconductor company that has benefited from its exposure to Apple (AAPL), which represents 70% of sales in the current year. The company has exposure to the Consumer sector (audio), and it has products aimed at Energy as well as Industrial Power (defense, medical, semiconductor capital equipment).
Ebix (EBIX) is a specialized software company focused on the insurance industry. Neustar (NSR) operates a clearinghouse that maintains the data required to make telephone call routing possible and has other specialized services too. This stock rocketed after announcing a $650mm acquisition in October (Targus Information, which enables Caller ID).
MKS Instruments (MKSI) makes equipment for the semiconductor, solar, LED and data storage industries as well as applications for other markets like medical equipment, pharmaceutical manufacturing, energy generation and environmental monitoring. The company initiated a dividend last year.
Blackbaud (BLKB) is a software company focused on not-for-profit organizations. Just recently, they announced the acquisition of a major competitor, helping to lift the stock to an all-time high.
So, hopefully I have given you a few ideas to investigate further. These are stocks that are clearly working and might deserve closer attention. Remember, screening is a starting point as part of a more thorough investment process.
In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Alan Brochstein maintains a cross-marketing relationship with TradeKing.
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