High Risk, High (Potential) Reward Small Caps

This article is part of our Rising Star Portfolios series.

Over the next couple of days, I'll be gathering more small- and mid-cap candidates for my Rising Stars "multivitamin" portfolio using my Foolish 8 and modified Foolish 8 screens. Today I'll 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
Five companies passed the screen this month:

Company

Market Cap 
(in millions)

Business

Add to Your Watchlist

3-D Systems
(Nasdaq: TDSC  )

$1,000

3-D printers and products

Add

Acme Packet (Nasdaq: APKT  )

$5,269

Communications equipment

Add

Financial Engines
(Nasdaq: FNGN  )

$1,226

Portfolio management services

Add

HFF (NYSE: HF  )

$566

Commercial real estate

Add

Interactive Intelligence
(Nasdaq: ININ  )

$688

Business software

Add

IPG Photonics (Nasdaq: IPGP  )

$3,292

Networking equipment

Add

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

The new stocks on the list this month are Acme Packet and IPG Photonics. Dropping off the screen from last month was Textainer Group Holdings (NYSE: TGH  ) . By the way, it's not a red flag if a stock drops off the screen because of relative strength (as Textainer did) or if it exceeds the revenue or daily dollar volume requirements. If it's for another reason, such as declining margins or sales, you'll want to dig deeper to understand the full story.

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

Company

Insider Ownership

Forward P/E

EV/FCF (TTM)

ROE

Net Margin

3-D Systems

10%

57.5

32.2

16%

14%

Acme Packet

18%

109.4

262.5

17%

19%

Financial Engines

22%

78.2

NM

43%

54%

HFF

19%

36.2

NM

25%

9%

Interactive Intelligence

24%

27.1

35.9

18%

9%

IPG Photonics

28%

65.8

159.5

23%

21%

Source: Capital IQ, a division of Standard & Poor's. P/E = price-to-earnings ratio; EV = enterprise value; FCF = free cash flow; TTM = trailing 12 months; ROE = return on equity.

The NM above stands for "not meaningful," which is the result of dividing by negative free cash flow. (In this case I'm using Capital IQ's unlevered free cash flow definition.) If any of these companies look interesting enough for me to research further, I'll delve more into the reasoning behind the 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. Until tomorrow!

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's words are kind, but his eyes are wild. He owns no companies mentioned here. Acme Packet, Interactive Intelligence, and IPG Photonics are Motley Fool Rule Breakers recommendations. The Fool owns shares of 3-D Systems and IPG Photonics. 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 (0) | Recommend This Article (5)

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.

Be the first one to comment on this article.

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: 1493852, ~/Articles/ArticleHandler.aspx, 12/19/2014 6:28:18 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