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. Friday, I revealed the results for this month's Foolish 8 screen and came up with 12 candidates. Those stocks are being tracked on the F8's own CAPS page.
Today, we turn to the Modified Foolish 8.
It's lonely at the top
For the second month in a row, not a single stock passes the Mod 8 screen. I'm actually quite pleased this is happening, and I have no inclination to loosen the requirements just to get a few companies to pass. The criteria are tough for a reason.
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 1 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, or AAII, the Mod 8 has had average annual returns of 15% from January 1998 through October 2011. The S&P 500 averaged 1.9% annually over that period. 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 in real life but that we will do while tracking our results.
Four to consider
Today I want to highlight four companies that almost passed the screen, failing on only the return-on-equity requirement. Each of these had greater than 15% ROE over the past four quarters and the past two fiscal years, missing on only that most distant third fiscal year. They are all also on this month's Foolish 8 screen, as explained in Friday's article.
Altisource Portfolio Solutions
Epoch Investment Partners
Hi Tech Pharmacal
Onward and upward
So, nothing this month from the Modified Foolish 8, but the small caps that passed Friday's Foolish 8 screen are still in play for me. I'll soon report back on whether any of them are a good fit for the portfolio. So far, I've bought four stocks off these two screens: LSB Industries, lululemon athletica, II-VI, and Kulicke & Soffa.
If you're interested in keeping up with any of these companies, just add them to your free watchlist -- and you'll gain access to The Motley Fool special report "Six Stocks to Watch from David and Tom Gardner."
- Add SolarWinds to My Watchlist.
- Add lululemon athletica to My Watchlist.
- Add LSB Financial to My Watchlist.
- Add Kulicke & Soffa Industries to My Watchlist.
- Add II-VI to My Watchlist.
- Add Hi Tech Pharmacal to My Watchlist.
- Add Epoch Investment Partners to My Watchlist.
- Add Altisource Portfolio Solutions to My Watchlist.
Fool analyst Rex Moore tweets but is not a twerp. He runs a real-money Rising Star portfolio based on his screens. Of the companies mentioned here, he owns shares of lululemon athletica. The Motley Fool owns shares of II-VI, lululemon athletica, and Kulicke & Soffa Industries. Motley Fool newsletter services have recommended buying shares of II-VI and lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.