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, using 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, 10 companies passed the screen:

Company

Market Cap
(in millions)

Business

Add to Your Watchlist

Altisource Portfolio Solutions (Nasdaq: ASPS  )

$905

Financial services

Add

CVD Equipment (Nasdaq: CVV  )

$95

Electronic equipment

Add

Financial Engines (Nasdaq: FNGN  )

$909

Portfolio management services

Add

Gulfport Energy (Nasdaq: GPOR  )

$1,367

Oil and gas

Add

Hi-Tech Pharmacal (Nasdaq: HITK  )

$426

Pharmaceuticals

Add

Interactive Intelligence

$615

Business software

Add

IPG Photonics (Nasdaq: IPGP  )

$2,664

Networking equipment

Add

SolarWinds (NYSE: SWI  )

$1,727

Business software

Add

Transcend Services

$280

Medical transcription

Add

Virtusa

$400

IT consulting

Add

Source: S&P Capital IQ.

New stocks on the list this month are Altisource Portfolio Solutions and Hi-Tech Pharmacal. Dropping off the list from last month are Cohen & Steers, Exlservice Holdings, and Preformed Line Products.

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

Altisource Portfolio Solutions

25%

20.8

27.3

41%

16%

CVD Equipment

24%

27.3 

10.0

9%

9%

Financial Engines

21%

55.2

NM

42%

52%

Gulfport Energy

18%

27.1

NM

29%

44%

Hi Tech Pharmacal

21%

11.5

11.9

29%

22%

Interactive Intelligence

24%

23.9

40.3

18%

9%

IPG Photonics

26%

52.7

NM

27%

23%

SolarWinds

47%

11.1

NM

16%

8%

Transcend Services

22%

32.8

26.5

30%

31%

Virtusa

12%

29.7

24.7

18%

12%

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.

On Monday 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 IPG Photonics and Interactive Intelligence Group. 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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