Thanks to the Internet, and sites such as Yahoo! Finance and MSN Money, investors have more tools than ever to search for stock ideas by running screens. But screens often return numerous stocks that need to be weeded out, because the numbers don't tell the whole story. Maybe the massive growth at one company was due to one-time tax adjustments, not core operations, for instance.
Just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until we add the appropriate hues. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a deeper look at a screen for small-cap growth stocks.
Better a screen than a window
In CAPS, investors can see how the collective community rates a company and can compare that rating with the opinions of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There are even pitch commentaries and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors qualitative resources far beyond mere numbers and tables.
To run this screen, we'll use the following criteria:
- Market cap between $100 million and $1 billion.
- Estimated growth rate in earnings per share for the next five years of at least 25%.
- Revenue growth for the current year to date of at least 30%.
This should give us the cream of the crop in terms of small-cap stocks that already have a developed performance record that is expected to continue. Understanding what's behind these high expectations for growth is where CAPS can really help.
Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.
|
Company |
Estimated 5-Year Growth Rate |
CAPS Rank (out of 5) |
|---|---|---|
|
VASCO Data Security |
32.5% |
***** |
|
Ceragon Networks |
27.3% |
***** |
|
Volcom |
25.8% |
**** |
|
Internap |
37.7% |
**** |
|
Dynamic Materials |
43% |
**** |
|
Syntax-Brillian |
25% |
** |
|
InterOil |
25% |
* |
Securing growth
Topping our list of small caps favored by CAPS investors is five-star data-security firm VASCO, a company that provides secure access to data networks and authentication services. The Illinois-based firm had been on a tear this year until it fell short of expected growth in its recent third-quarter earnings report. Investors reacted bluntly, shaving 50% off an already pricey stock in the ensuing weeks.
But even with the earnings miss, many CAPS investors believe the future is bright for VASCO, and a cheaper stock price could make it even brighter. The firm continues to report increasing margins, with operating margins now coming in at 28%. The projected revenue growth of between 55% and 65%, along with further expansion into international markets, still has a strong contingent of CAPS investors supporting the company as well. In fact, more than 97% of investors rating the company believe it will outperform the S&P going forward, including 275 of the 284 All-Stars.
Things that go boom
How could you not like the idea of investing in a company with the ticker symbol BOOM? Investors who have put their money behind the firm must have been fans, since stock in Dynamic Materials has already more than doubled this year. The Colorado-based explosive welding firm has enjoyed tremendous growth as demand for welded clad metal plates has literally boomed. Sales in the most recent quarter were 69% higher than last year's levels, and the company reported a 93% jump in net income to $7.1 million. The company also sports an impressive return on equity of 37%.
With a strong backlog of orders, management sees continued demand ahead for the company and is working to expand capacity. Confidence in the business also recently led Dynamic Materials to acquire a German explosion welder for just less than $100 million in cash and stock. The firm's dominance of its niche and continued growth opportunities have many CAPS investors excited about the future, as well. Out of the 403 investors rating the company, 389 have voted for Dynamic Materials to outpace the S&P in the future.
Let 76,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community's worth of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.
Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion in Motley Fool CAPS.
