One of the things I enjoy most about my profession is doing deep research on superstar stocks to see what they all have in common. In "Six Signs of a Winner," Motley Fool co-founder Tom Gardner and I wrote about the winning characteristics of Progressive Insurance, which had been a 60-bagger over the past 17 years, turning a $5,000 investment into $300,000.
Today, I'll share one of the most interesting and profitable bits of research we've done. In broadening our study, we found seven commonalities of superstar winners. I'll talk about these, and reveal the only 15 stocks that have every attribute.
The screening process here is actually very interesting. I started with all companies on major U.S. exchanges that have a market cap of at least $200 million. That's 3,564 companies. Then I screened for:
1. Double-digit rising sales
We view this as one of the most telling indicators of a real growth company. We love earnings growth as well, but earnings are too easily manipulated. Revenue growth, however, is a pretty pure marker of rising demand and pricing power.
This requirement cut out biggies like Monsanto
2. Rising free cash flow and book value
While earnings can be fudged, cash is where it's at -- and great businesses generate lots of it. A company that's growing both its free cash flow and book value is on the right track. We're down to 434 companies.
3. Improving margins
It's getting tougher now, but we're looking for excellence. The ability to take in more and more profit from each dollar of sales is an indication of competitive advantages and efficient management. I screened for improving margins from continuing operations, and that cut it to 191 companies. Here, we say goodbye to TransAtlantic Petroleum
4. Rising return on equity
We use ROE as a decent proxy for how well a company allocates capital -- what Warren Buffett calls the most important aspect of management. And, once again, we're interested in improvement over the last 12 months. We're down to 169.
5. Insider ownership
This one's no surprise to all you veteran Fools out there. As shareholders of a company, we are part owners of the business, and we'd like a significant portion of management to be our co-owners. That way there's more incentive for them to act in our best interests. I always look for insider ownership of 5% or more. We lost a lot of companies this time, and now we're left with 72.
6. Regular dividends
There's research out there that indicates dividend-paying companies tend to be better at managing capital and growing earnings. We feel that the pressure of making quarterly cash payments forces a certain discipline on managers, and deters them from such destructive habits as "empire building" -- that's when companies in search of something to do with their cash start making less-than-ideal acquisitions. This screen requires a dividend yield of greater than zero, so even small payers can get by. Fifty-seven others miss the cut here, and we're down to our final 15.
The envelope, please
Here are the only companies that passed every requirement of my screen:
|
Company |
Market Cap (Millions) |
Insider Ownership |
Price Change |
|---|---|---|---|
| Franklin Resources |
$26,239 |
34% |
4.8% |
| Rogers Communications |
$22,917 |
25% |
44% |
| Nidec |
$12,168 |
29% |
(3.6)% |
| Nordstrom |
$8,504 |
23% |
12.8% |
| Guess? |
$3,978 |
28% |
11% |
| DeVry |
$2,934 |
10% |
(25.9)% |
|
Jack Henry & Associates |
$2,274 |
7% |
8.8% |
| Nu Skin Enterprises |
$1,986 |
14% |
49.9% |
| Thor Industries |
$1,642 |
22% |
(1.2)% |
|
Cubic |
$1,127 |
35% |
10.5% |
| Monro Muffler Brake |
$996 |
6% |
52.4% |
|
Seaspan |
$918 |
32% |
33.8% |
| WD-40 Company |
$656 |
6% |
20.8% |
| Inter Parfums |
$534 |
50% |
40.5% |
| Baldwin & Lyons |
$373 |
44% |
8.3% |
Data provided by Capital IQ, a division of Standard & Poor's.
Seventh heaven
"Now wait," I hear you saying. The title says seven signs of a winner." You are correct, oh eagle-eyed reader. The seventh attribute Tom and I found was "out-of-the-way success." Many big winners come out of relative obscurity, and are never media darlings or hot IPOs. That's rather hard to screen for, but that's OK: It seems the companies that made the final list aren't exactly bantered about at many cocktail parties anyway.
A common-sense disclaimer is required here: Screens such as this provide a great starting point for further research, but these companies are not formal recommendations. This screen does, however, cover attributes that many of our newsletter advisors seek. -- including those at Million Dollar Portfolio. Advisor Ron Gross and his team are seeking the "best of the best" stocks from across the Motley Fool newsletter universe as they invest $1 million of the Fool's own money. The service will be opening up to new members for the only time in 2010 -- for one week only. For more information, just click here.
This article was first published on Feb. 11, 2010. It has been updated.
True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.
Fool analyst Rex Moore contributes the Foolish 8 screens to Hidden Gems. He owns no companies mentioned here. Monsanto is a former Motley Fool Inside Value recommendation. Cubic is a Motley Fool Stock Advisor selection. Rogers Communications and United Parcel Service are Motley Fool Income Investor picks. Motley Fool Options has recommended writing covered calls on Guess?, a synthetic long position on Monsanto, and a covered strangle position on Seaspan. The Fool owns shares of Guess?, Jack Henry & Associates, Seaspan, and United Parcel Service. The Motley Fool has a disclosure policy.
