High-Risk, High-Reward Small Caps

This article is part of our Rising Star Portfolios series.

I'll be gathering more small- and mid-cap candidates for my Rising Star "multivitamin" portfolio over the next few days via my Foolish 8 and modified Foolish 8 screens. Today I present the Foolish 8, which was developed by Motley Fool co-founder David Gardner to identify profitable, rapid-growth, small-cap stocks. Here are the eight criteria:

  1. Revenues: $500 million or less.
  2. Earnings and sales growth: 25% or greater.
  3. Net profit margin: 7% or greater.
  4. Daily dollar volume: $1 million to $25 million.
  5. Insider holdings: 10% or greater.
  6. Share price: $7 or greater.
  7. Relative strength: 90 or greater.
  8. Operating cash flow: a positive number.

The contenders
This month, eight companies passed the screen:

Company

Market Cap (in millions)

Business

Add to Your Watchlist

AeroVironment (Nasdaq: AVAV  )

$661

Aerospace and defense

Add

Altisource Portfolio Solutions (Nasdaq: ASPS  )

$1,023

Real estate management and development

Add

CVD Equipment

$94

Semiconductors and semiconductor equipment

Add

Hi Tech Pharmacal (Nasdaq: HITK  )

$433

Pharmaceuticals

Add

IPG Photonics (Nasdaq: IPGP  )

$2,269

Electronic equipment, instruments, and components

Add

Mercadolibre (Nasdaq: MELI  )

$3,764

Internet software and services

Add

SolarWinds (NYSE: SWI  )

$2,164

Software

Add

Twin Disc (Nasdaq: TWIN  )

$480

Machinery

Add

Source: S&P Capital IQ.

New stocks on the list this month are AeroVironment, Mercadolibre, and Twin Disc. Dropping off the list from last month are Financial Engines, Gulfport Energy, Interactive Intelligence, Transcend Services, and Virtusa.

Biggie smalls
Here's a look at some interesting metrics for these small fries:

Company

Insider Ownership

Forward P/E

EV/FCF (TTM)

ROE

Net Margin

AeroVironment

16%

29.3

24.8

12%

9%

Altisource Portfolio Solutions

26%

24.4

20.6

45%

16%

CVD Equipment

24%

0.0

9.9

9%

9%

Hi Tech Pharmacal

21%

11.5

12.1

29%

22%

IPG Photonics

26%

45.1

90.4

31%

25%

Mercadolibre

12%

67.8

60.2

39%

26%

SolarWinds

22%

40.9

26.9

32%

33%

Twin Disc

25%

25.9

NM

21%

8%

Source: S&P Capital IQ. P/E = price-to-earnings ratio; EV = enterprise value; FCF = free cash flow; TTM = trailing 12 months; ROE = return on equity; NM = not meaningful because of negative FCF.

Tomorrow I'll show you the results of this month's modified Foolish 8 screen and then talk about the companies that interest me from both screens in more depth.

If you're interested in keeping up with any of these companies, add them to your free watchlist by clicking the "add" button in the far-right column of the top table. You can also follow me on Twitter and check out the multivitamin discussion board.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Fool analyst Rex Moore reminds you that time always holds the winning hand. He owns no companies mentioned here. The Motley Fool owns shares of IPG Photonics. Motley Fool newsletter services have recommended buying shares of Interactive Intelligence, IPG Photonics, AeroVironment, and Mercadolibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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