This article is part of our Rising Star Portfolios series.
Over the next couple of days, I'll be gathering more small- and mid-cap candidates for my Rising Stars "multivitamin" portfolio using my Foolish 8 and modified Foolish 8 screens. Today I'll present the Foolish 8, which was developed by Motley Fool co-founder David Gardner to identify profitable, rapid-growth, small-cap stocks. Here are the eight criteria:
- Revenues: $500 million or less.
- Earnings and sales growth: 25% or greater.
- Net profit margin: 7% or greater.
- Daily dollar volume: $1 million to $25 million.
- Insider holdings: 10% or greater.
- Share price: $7 or greater.
- Relative strength: 90 or greater.
- Operating cash flow: a positive number.
The contenders
Five companies passed the screen this month:
|
Company |
Market Cap |
Business |
Add to Your Watchlist |
|---|---|---|---|
|
3-D Systems
|
$1,000 |
3-D printers and products | |
|
Acme Packet (Nasdaq: APKT) |
$5,269 |
Communications equipment | |
|
Financial Engines
|
$1,226 |
Portfolio management services | |
|
HFF (NYSE: HF) |
$566 |
Commercial real estate | |
|
Interactive Intelligence |
$688 |
Business software | |
|
IPG Photonics (Nasdaq: IPGP) |
$3,292 |
Networking equipment |
Source: Capital IQ, a division of Standard & Poor's.
The new stocks on the list this month are Acme Packet and IPG Photonics. Dropping off the screen from last month was Textainer Group Holdings (NYSE: TGH). By the way, it's not a red flag if a stock drops off the screen because of relative strength (as Textainer did) or if it exceeds the revenue or daily dollar volume requirements. If it's for another reason, such as declining margins or sales, you'll want to dig deeper to understand the full story.
Biggie smalls
Here's a look at some interesting metrics for these small-frys:
|
Company |
Insider Ownership |
Forward P/E |
EV/FCF (TTM) |
ROE |
Net Margin |
|---|---|---|---|---|---|
|
3-D Systems |
10% |
57.5 |
32.2 |
16% |
14% |
|
Acme Packet |
18% |
109.4 |
262.5 |
17% |
19% |
|
Financial Engines |
22% |
78.2 |
NM |
43% |
54% |
|
HFF |
19% |
36.2 |
NM |
25% |
9% |
|
Interactive Intelligence |
24% |
27.1 |
35.9 |
18% |
9% |
|
IPG Photonics |
28% |
65.8 |
159.5 |
23% |
21% |
Source: Capital IQ, a division of Standard & Poor's. P/E = price-to-earnings ratio; EV = enterprise value; FCF = free cash flow; TTM = trailing 12 months; ROE = return on equity.
The NM above stands for "not meaningful," which is the result of dividing by negative free cash flow. (In this case I'm using Capital IQ's unlevered free cash flow definition.) If any of these companies look interesting enough for me to research further, I'll delve more into the reasoning behind the negative FCF.
Tomorrow I'll show you the results of this month's modified Foolish 8 screen, and then talk about the companies that interest me from both screens in more depth.
If you're interested in keeping up with any of these companies, add them to your free watchlist by clicking the "add" button in the far-right column of the top table. You can also follow me on Twitter and check out the multivitamin discussion board. Until tomorrow!
This article is part of our Rising Star 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. See all of our Rising Star analysts (and their portfolios).
