4 Stocks With Big Potential

This article is part of our Rising Star Portfolio 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 five 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:

  • Raised the revenue cap to $900 million or less.
  • Took the $25 million limit off the daily dollar volume requirement, making it simply $1 million or greater.
  • Loosened the relative strength requirement to 50 or greater.
  • Required not only positive cash flow, but also positive free cash flow.
  • Required a price-to-free-cash-flow-to-cash-flow growth (PFCF-to-FCF growth) multiple of 1.00 or less. I have tweaked the screen to use actual FCF growth over the past year.
  • Required better than 15% return on equity 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 gained more than 1,000% from January 1998 through February 2011, for an outstanding 22.1% average annual growth rate. The S&P 500 averaged 2.4% over that period. (Disclaimer: The AAII methodology involves buying a stock the month it appears on a screen and selling when it's off -- something we'd never do. Still, this performance points to the screen's strong potential.)

Only four companies pass the screen this month.

Company

Market Cap (millions)

Business

Add to Your Watchlist

NetEase.com (Nasdaq: NTES  )

$6,868

Internet software/services

Add

lululemon athletica (Nasdaq: LULU  )

$6,565

Athletic apparel

Add

Ebix (Nasdaq: EBIX  )

$887

Application software

Add

iGATE (Nasdaq: IGTE  )

$998

IT consulting

Add

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

New stocks to the list this month: lululemon and iGATE (both of which we've seen in past months). Dropping off the screen from last month is Lihua International (Nasdaq: LIWA  ) . That leaves Ebix and NetEase as the veteran holdovers. Digging deeper:

Company

Insider Ownership

Forward P/E

EV/FCF (TTM)

ROE

Net Margin

NetEase.com

46%

21.3

20.1

26%

41%

lululemon athletica

32%

61.2

52.7

39%

17%

Ebix

13%

16.1

24.0

29%

45%

iGATE

45%

19.4

31.9

24%

18%

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 report 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!

This article is part of our Rising Star Portfolio 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. Click here to see all of our Rising Star analysts (and their portfolios).

After years of exhaustive research, Fool analyst Rex Moore has determined that a stitch in time actually saves only 8.9997. At the time of publication, he owned shares of lululemon. Ebix, lululemon athletica, and NetEase.com are Motley Fool Rule Breakers selections. The Fool owns shares of Ebix and lululemon. 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.


Read/Post Comments (2) | Recommend This Article (21)

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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 April 15, 2011, at 6:28 PM, Borbality wrote:

    Ebix gives me the willies. Write something about it on Seeking Alpha and watch the stock drop 30%.

  • Report this Comment On April 18, 2011, at 8:15 AM, midnightmoney wrote:

    Borbality, I agree with you. I bought ebix a while back and experienced nausea for the first time in years watching that 30-something percent fall. Fortunately, I've followed the good advice here and diversified. The ebix website is outdated, inscrutable, strange, and verging on insipid. Beyond that there are dead people who communicate better with the public than ebix does. I've stuck with them because I believe they are a good company, and I like Rob Raina, despite his inability to create an image of the company that would appeal to a wider investor audience outside of the insurance industry. Beyond that they boosted their share buy-back programme considerably, which speaks volumes, so I'm guessing.

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