This article is part of our Rising Star Portfolios series.
One of the major goals of my Rising Stars portfolio is to introduce and explain the various screens I use to find great stocks. (Another major goal is to make money. Of course.)
I'll be running each screen at least monthly. In the batter's box today: my "7 Signs of a Winner" screen.
The windup ...
This particular screen was born out of my work with Motley Fool co-founder Tom Gardner for the Motley Fool Hidden Gems service. Tom is always studying winning and losing stocks in order to learn how to better find the champions and avoid the dogs -- and I help him as best I can. A few years ago, we studied all of the Hidden Gems winners to find out what they had in common. We found that many of them shared these seven traits:
- Double-digit rising sales: We view this as one of the most telling indicators of a real growth company. We love earnings growth as well, but earnings are too easily manipulated. Revenue growth, however, is a pretty pure marker of rising demand and pricing power.
- Rising free cash flow and book value: While earnings can be fudged, cash is where it's at -- and great businesses generate lots of it. A company that's growing both its free cash flow and book value is on the right track.
- Improving margins: The ability to take in more and more profit from each dollar of sales indicates competitive advantages and efficient management.
- Rising return on equity: We use ROE as a decent proxy for how well a company allocates capital -- what Warren Buffett calls the most important aspect of management.
- Insider ownership: This one's no surprise to all you veteran Fools out there. As shareholders of a company, we are part-owners of the business, and we'd like a significant portion of management to be our co-owners. That way, there's more incentive for them to act in our best interests. We look for insider ownership of 5% or more.
- Regular dividends: Research indicates that dividend-paying companies tend to be better at managing capital and growing earnings. We feel that the pressure of making quarterly cash payments forces a certain discipline on managers, and deters them from such destructive habits as "empire building" -- that's when companies in search of something to do with their cash start making less-than-ideal acquisitions.
- Out-of-the-way success: Many big winners come out of relative obscurity and are never media darlings or hot IPOs.
... and the pitch!
Armed with that information, the natural question to ask is, "How can I find companies that meet these standards?" Well, by screening, of course! Armed with my awesome Capital IQ screening tool, I looked for companies with more than $200 million in market cap that met the following criteria over the past 12 months:
The only thing I couldn't screen for is out-of-the-way success, but we can do that mentally at the end.
Out of the 3,720 companies on U.S. exchanges with a market cap of $200 million or greater, only 33 passed the screen:
|
Company
|
Market Cap
(in millions)
|
Insider
Ownership
|
1-Year Price Change
|
|
Coca-Cola
|
$154,279
|
5%
|
22%
|
|
Franklin Resources
|
$28,374
|
34%
|
12%
|
|
Paccar (Nasdaq: PCAR )
|
$19,529
|
7%
|
22%
|
|
YPF
|
$18,461
|
15%
|
12%
|
|
Nordstrom
|
$9,838
|
23%
|
9%
|
|
MercadoLibre (Nasdaq: MELI )
|
$3,661
|
12%
|
68%
|
|
Southern Union
|
$3,616
|
7%
|
12%
|
|
Quality Systems
|
$2,467
|
34%
|
39%
|
|
Thor Industries
|
$1,895
|
21%
|
11%
|
|
Schnitzer Steel Industries (Nasdaq: SCHN )
|
$1,809
|
8%
|
24%
|
|
Grupo Aeroportuario
|
$1,776
|
25%
|
15%
|
|
Nu Skin Enterprises
|
$1,774
|
11%
|
(2%)
|
|
Wacoal Holdings
|
$1,758
|
6%
|
(12%)
|
|
HEICO
|
$1,714
|
15%
|
48%
|
|
Industrias Bachoco
|
$1,408
|
83%
|
28%
|
|
Healthcare Services Group
|
$1,174
|
5%
|
18%
|
|
AmTrust Financial Services
|
$1,135
|
39%
|
34%
|
|
iGATE
|
$1,068
|
45%
|
91%
|
|
Monro Muffler Brake
|
$1,022
|
6%
|
40%
|
|
Micrel
|
$822
|
19%
|
23%
|
|
Sun Hydraulics (Nasdaq: SNHY )
|
$769
|
7%
|
73%
|
|
Computer Programs & Systems
|
$712
|
6%
|
66%
|
|
The Ensign Group
|
$679
|
27%
|
84%
|
|
Park Electrochemical
|
$664
|
9%
|
11%
|
|
Gorman-Rupp
|
$659
|
27%
|
56%
|
|
Great Lakes Dredge & Dock (Nasdaq: GLDD )
|
$456
|
6%
|
45%
|
|
Main Street Capital (NYSE: MAIN )
|
$420
|
16%
|
18%
|
|
Lincoln Educational Services
|
$367
|
6%
|
(35%)
|
|
Cass Information Systems
|
$364
|
17%
|
25%
|
|
MassMutual Corporate Investors
|
$305
|
19%
|
21%
|
|
Monmouth Real Estate Investment
|
$287
|
7%
|
(1%)
|
|
Deer Consumer Products (Nasdaq: DEER )
|
$233
|
47%
|
(43%)
|
|
DDI
|
$213
|
17%
|
82%
|
Source: Capital IQ, a division of Standard & Poor's.
Since we also want out-of-the-way success, we can eliminate any well-known names from the list, such as Coca-Cola.
If you're looking for a free screening tool, start with the Motley Fool CAPS screener. It can't do everything the industrial-strength Capital IQ is capable of, but it's a good start.
Is it a hit?
I'll be looking through these companies to see if any are right for my multivitamin portfolio. Coke is already in the port. I'm also very familiar with Paccar; I've owned it personally since 2005, and it's more than doubled for me during a period in which the S&P 500 has gained about 10%.
I'll report back on my findings at a later date. To keep up, simply follow me on Twitter, bookmark my archive page, or check in on my discussion board. Finally, if you're interested in any of the companies I listed, add them to your very own personal watchlist!
RSS Headlines
Fool UK