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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.
Baidu (NASDAQ: BIDU ) , the Chinese search engine giant, sports a five-year average annual revenue growth rate of 72% and a net profit margin of 46.6%. Its stock is down about 42% from its 52-week high, partly on concerns about China's slowing growth rate. Baidu has seen some decelerating revenue growth recently, but its long-term prospects are good, as much of China and Asia have yet to get online, representing further growth potential. Better still, many of its numbers outshine those of Google, though it does have serious competition, too.
Silver Wheaton (NYSE: SLW ) sports a five-year average annual revenue growth rate of 39% and a net profit margin of 73.3%. This precious metals specialist's business model is rather beautiful, as instead of being involved in relatively risky and capital-intensive mining, it simply buys the rights to income from mines in exchange for financing. It has many investors excited recently, too, with a new deal it struck with Vale for rights to big chunks of Vale's gold production at two mines -- and management is very bullish, thinking there's a big chance that the mines will overproduce.
Prospect Capital (NASDAQ: PSEC ) sports a five-year average annual revenue growth rate of 45% and a net profit margin of 48.4%. Prospect is a private equity business development company ("BDC"), specializing in energy companies, and recently yielding close to 12%. Its earnings jumped significantly recently, and it has been busy making many new investments. A risk it faces is that of companies defaulting, but its default rate has been low and Prospect is not that leveraged, overall, compared to some peers. It has been issuing a lot of shares, though, which concerns some, but my colleague Tim Beyers has supported the move.
Seadrill (NYSE: SDRL ) sports a five-year average annual revenue growth rate of about 21% and a net profit margin of 23.1%. One of the world's largest oil and gas offshore drillers, it carries substantial debt, but also sports a massive backlog of topping $21 billion and operates in the most profitable deepwater drilling regions, among other locations. Bears don't like its negative free cash flow , but that's been moving in the right direction, and in the meantime, the company pays a hefty 9% dividend yield and is expanding its fleet.
Intuitive Surgical (NASDAQ: ISRG ) sports a five-year average annual revenue growth rate of 29% and a net profit margin of 30.1%. Intuitive is the leader in robotic surgical equipment, and there's much to like about it, such as its repeating revenue from service contracts and supplies. Here's a concern, though, that recently sent shares downward: Some studies suggest that robot-assisted surgeries may not be much more effective than traditional ones. (Some of these studies ignore the faster recovery times for less-invasive procedures.) The company has been trying to appeal more directly to doctors and hospitals lately. A new tax on medical devices will squeeze Intuitive's bottom line a bit, but it has the earnings to handle it -- and, on the plus side, the tax is likely to hurt its less profitable or unprofitable peers more.
Fat profit margins and heady growth are a nice combination. Just be sure to check out other numbers and factors as well before investing. Make sure you're keeping your money in your best ideas.
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