When you seek out compelling candidates for your stock portfolio, there are lots of numbers you can assess – price-to-earnings ratios, debt-to-equity ratios, free cash flow, and so on. To gather a manageable list of possibilities, you might want to employ a screen that will narrow down the universe of stocks according to whichever criteria you set. I did just that recently and arrived at a handful of interesting companies that are growing rapidly and reaping hefty profits.
At finviz.com, I screened for stocks with:
- a market capitalization of at least $300 million. This includes many small companies, but not tiny ones.
- revenue growth over the past five years of at least 10%. This is a good measure because it's hard to grow your bottom line if your top line isn't growing.
- earnings per share (EPS) growth over the next five years expected to be positive -- because why aim for companies expected to experience shrinking EPS?
- net profit margins of more than 15%. Net margins reflect how much of each dollar of revenue is retained as earnings.
Why fat margins?
It's a big plus for a portfolio candidate to have a hefty net margin for several reasons. For starters, it tends to reflect some competitive advantage, such as brand power or a business model that's not too capital intensive and scales efficiently -- perhaps one with relatively fixed costs. Think of a software company, for example. Once it develops some software, for it to double its sales, it doesn't have to double all the work that went into developing the software. It just has to make it available via a disk or a download or some other inexpensive means of delivery. A big margin also gives a company some wiggle room, permitting it to lower costs when necessary, without a lot of pain.
Here are a few companies that my screen produced. See if any of them interest you, and perhaps add them to your watch list or portfolio.
Cirrus Logic (NASDAQ: CRUS ) : Semiconductor chip designer Cirrus Logic sports a five-year average annual revenue growth rate of nearly 30% and a net profit margin of 22.6%. The company's rapid growth rate is not so surprising once you realize that with its chips in almost every iProduct, it's riding on Apple's coattails for the lion's share of its revenue. But while Apple stock has been deflated lately, Cirrus is up for the year, recently blowing past earnings estimates and offering robust projections as well. On top of that, with a P/E ratio around 10, it seems fetchingly priced.
QuestCor (NASDAQ: QCOR.DL ) : Questcor sports a five-year average annual revenue growth rate of 47% and a net profit margin of 39.4%. The biopharmaceutical company has a multiple sclerosis (MS) drug, Acthar, that's selling well, and it's also setting its sights on rheumatology. It has its risks, though, such as an investigation into its marketing practices as well as competition. In its just-reported fourth quarter, revenue more than doubled, though Acthar sales for MS retreated a bit.
InvenSense (NYSE: INVN ) : InvenSense sports a three-year average annual revenue growth rate of 74% and a net profit margin of 23.6%. It's a leader in the motion-sensor market, supplying millions of smartphones and tablets, among other things. Bulls like its plans to grow in China and find it attractive at recent levels.
Kodiak Oil and Gas (NYSE: KOG ) : Kodiak sports a five-year average annual revenue growth rate of 109% and a net profit margin of 19.4%. This energy company has been growing rapidly, particularly in the Bakken shale fields, and with its small size, has lots of room to grow. Its efficiency is one of the secrets to its success. It's not a perfect picture, though, as its cash burn and debt load are concerns, and falling oil prices could spell trouble.
8X8 (NASDAQ: EGHT ) : Oddly named 8x8 sports a five-year average annual revenue growth rate of 10% and a net profit margin of 73.8%. The specialist in high-margin voice-over-IP software took a hit last month, when the company's third-quarter earnings report wasn't quite as stellar as hoped, though it does have many strong and growing numbers, such as revenue per customer. Some wonder whether it will end up acquired. Its recent P/E ratio of 6 is also appealing.
Fat profit margins and heady growth is a nice combination. Just be sure to check out other numbers and factors before investing. Make sure you're keeping your money in your best ideas.
Kodiak Oil & Gas is a dynamic growth story, but with great opportunities come great risks. Before you hitch your horse to this carriage, let us help you with your due diligence. To see if Kodiak is currently a buy or sell, check out our new premium report, which comes with a year of timely updates and analysis.