5 Rising Star Candidates

This article is part of our Rising Star Portfolios series.

Today, my search continues for some great small- and mid-cap stocks to add to my real-money "multivitamin" portfolio. Yesterday, I revealed the results for this month's Foolish 8 screen and came up with eight candidates; today, we turn to the Modified Foolish 8.

Mod squad
For a refresher, here's a summary of the changes I made to turn the Foolish 8 into the Mod-8:

  1. Raised the revenue cap to $900 million or less.
  2. Took the $25 million limit off the daily dollar volume requirement, making it simply $1 million or greater.
  3. Loosened the relative strength requirement to 50 or greater.
  4. Required not only positive cash flow, but also positive free cash flow.
  5. Required a price to free cash flow-to-cash flow growth (PFCF-to-FCF growth) multiple of 1.00 or less.
  6. Required better than 15% return on equity (ROE) over the past four quarters, and for each of the past three fiscal years.

According to the independent American Association of Individual Investors, the Mod-8 recorded a 1,002% total gain from January 1998 to December 2010, for an outstanding 20% annual growth rate. (Disclaimer: The AAII methodology involves buying a stock the month it appears on a screen and selling when it's off, which is something we'd never do. Still, this performance points to the strong potential of the screen.)

Only five companies pass the screen this month.

Company

Market Cap (millions)

Business

Add to Your Watchlist

China Biologic Products (Nasdaq: CBPO  )

$421.5

Biotechnology

Add

Ebix (Nasdaq: EBIX  )

$982.3

Application software

Add

II-VI (Nasdaq: IIVI  )

$1,585.7

Electrical components

Add

lululemon athletica (Nasdaq: LULU  )

$5,788.6

Athletic apparel

Add

MercadoLibre (Nasdaq: MELI  )

$3,181.0

Online commerce

Add

Source: Capital IQ, a division of Standard & Poor's.

There are some familiar names here, including China Biologic, which is also on the Foolish 8 screen, and lululemon, which I bought for the portfolio last month. Digging deeper:

Company

Insider Ownership

Forward P/E

EV/FCF (TTM)

ROE

Net Margin

China Biologic

43%

36.2

15.9

51%

24%

Ebix

13%

25.6

21.3

33%

43%

II-VI

13%

46.1

76.3

16%

14%

lululemon

33%

108.5

61.1

37%

15%

MercadoLibre

12%

97.2

91.5

37%

25%

Source: Capital IQ, a division of Standard & Poor's.

Onward and downward
In the coming days, I'll take a close look at these companies, as well as the small caps that passed yesterday's Foolish 8 screen. I'll soon be reporting back on whether any of them are a good fit for my portfolio.

If you're interested in keeping up with any of these companies, add them to your free watchlist by clicking the appropriate "add" button in the top table. To keep up with me, meanwhile, follow me on Twitter and check out the multivitamin discussion board. Fool on!

After years of exhaustive research, Rex Moore has determined that a stitch in time actually saves only 8.9997. At the time of publication, he owned no companies mentioned in this article. Ebix, lululemon athletica, and MercadoLibre are Motley Fool Rule Breakers recommendations. Motley Fool Alpha has opened a short position on MercadoLibre, which is a Motley Fool Big Short short-sale recommendation. The Fool owns shares of Ebix, II-VI, and lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (2) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 20, 2011, at 5:17 PM, stokker3 wrote:

    Just curious how you arrived at the forward P/E on MELI. It is nowhere near 97x. They are expected to make $1.56 and the stock is at less than $73.

  • Report this Comment On February 21, 2011, at 9:24 PM, ozzfan1317 wrote:

    Your forward PE's are actually the trailing PE's on a forward basis many of those stocks are much cheaper.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1444831, ~/Articles/ArticleHandler.aspx, 9/17/2014 11:51:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement