This article is part of our Rising Stars Portfolios series.

One of the major goals of my Rising Stars portfolio is to introduce and explain the various screens I use to find great stocks. (Another major goal is to make money. Of course.)

I'll be running each screen at least monthly. In the batter's box today: my "7 Signs of a Winner" screen.

The windup ...
This particular screen was born out of my work with Motley Fool co-founder Tom Gardner for the Hidden Gems service. Tom is always studying winning and losing stocks in order to learn how to better find the champions and avoid the dogs -- and I help him as best I can. A few years ago, we studied all of the Hidden Gems winners to find out what they had in common. We found many of them shared these seven traits:

  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.
  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.
  3. Improving margins: The ability to take in more and more profit from each dollar of sales is an indication of competitive advantages and efficient management.
  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.
  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. We look for insider ownership of 5% or more.
  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.
  7. Out-of-the-way success: Many big winners come out of relative obscurity and are never media darlings or hot IPOs.

... And the pitch!
Armed with that information, the natural question to ask is "How can I find companies that meet these standards?" Well, by screening, of course! Armed with my awesome Capital IQ screening tool, I looked for companies larger than $200 million in market cap that met the following criteria over the past 12 months:

  • Total revenue growth 10% or better
  • Free cash flow growth greater than zero
  • Book value growth greater than zero
  • Net margin growth greater than zero
  • ROE growth greater than zero
  • Insider ownership 5% or better
  • Dividend yield greater than zero

The only thing I couldn't screen for is out-of-the-way success, but we can do that mentally at the end.

Out of the 3,714 companies on U.S. exchanges with a market cap of $200 million or greater, only 26 passed the screen:

Company

Market Cap
(in millions)

Insider
Ownership

1-Year Price Change

Coca-Cola (NYSE: KO)

$149,612

5%

20%

Franklin Resources

$28,006

34%

19%

PACCAR (Nasdaq: PCAR)

$17,974

12%

28%

Nordstrom

$9,609

23%

15%

Guess?

$4,187

17%

9%

Williams-Sonoma

$3,802

9%

62%

National Semiconductor

$3,739

7%

6%

Southern Union

$3,575

7%

20%

Mercadolibre (Nasdaq: MELI)

$2,957

12%

54%

Quality Systems (Nasdaq: QSII)

$2,363

34%

43%

Nu Skin Enterprises

$1,936

11%

12%

Wacoal Holdings

$1,892

6%

(1)%

Thor Industries

$1,816

21%

(8)%

Schnitzer Steel Industries (Nasdaq: SCHN)

$1,798

8%

34%

Grupo Aeroportuario Del Sureste

$1,656

25%

4%

HEICO

$1,557

17%

40%

Industrias Bachoco

$1,368

83%

38%

Health care Services Group (Nasdaq: HCSG)

$1,163

5%

17%

iGATE

$1,052

45%

107%

Monro Muffler Brake (Nasdaq: MNRO)

$980

6%

39%

Dorchester Minerals

$852

8%

29%

The Ensign Group

$658

25%

77%

Park Electrochemical

$650

9%

11%

Inter Parfums

$564

48%

32%

Monmouth Real Estate Investment

$285

6%

7%

DDI

$213

19%

106%

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

If you're looking for a free screening tool, start with the Motley Fool CAPS screener. It can't do everything the industrial-strength Capital IQ is capable of, but it's a good start.

Is it a hit?
I'll be looking through these companies to see if any are right for my multivitamin portfolio. I'm already quite familiar with Paccar; I've owned it personally since 2005, and it's more than doubled for me during a period in which the S&P 500 has gained about 10%.

I'll report back on my findings at a later date. To keep up, simply follow me on Twitter, bookmark my archive page, or check in on my discussion board. Finally, if you're interested in any of the companies I listed, add them to your very own personal watchlist!

This article is part of our Rising Stars 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. Click hereto see all of our Rising Stars analysts (and their portfolios).

Fool analyst Rex Moore suggests you take a deep breath before tackling this disclosure statement, especially if you move your lips while reading. Rex owns shares of PACCAR. Coca-Cola is a Motley Fool Inside Value and Motley Fool Income Investor pick. MercadoLibre is a Motley Fool Rule Breakers selection. PACCAR and Quality Systems are Motley Fool Stock Advisor recommendations. Grupo Aeroportuario Del Sureste is a Motley Fool Hidden Gems pick. Motley Fool Alpha has opened a short position on MercadoLibre, which is a Motley Fool Big Short short-sale recommendation. Motley Fool Options has recommended writing puts on Guess?. The Fool owns shares of Coca-Cola and Guess?. 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.