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Only 1 Stock Passes This Tough Screen

Rex Moore
November 11, 2011

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:

  • 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 one or less. I have tweaked the screen to use actual FCF growth over the past year.
  • Required greater 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 has an average annual growth rate of 20.2% from January 1998 through May 2011. The S&P 500 averaged 2.5% annually 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 one company passes the screen this month.


Market Cap
(in millions)


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LSB Industries (NYSE: LXU  ) $750 HVAC and chemical products Add

Source: S&P Capital IQ.

Hittite Microwave (Nasdaq: HITT  ) dropped off the screen from last month.

LSB is a diversified small cap with two main segments, climate control and chemical. Its agriculture chemical products place it in direct competition with fertilizer powerhouses Terra Nitrogen (NYSE: TNH  ) and PotashCorp (NYSE: POT  ) . I covered its latest earnings report in depth and came to the conclusion that the 15% sell-off was overdone. Digging deeper: