The First Cut: Navellier's Growth Stock Winners
by John Bajkowski
The First Cut is designed as a starting point for investors. Each issue we list the top 30 stocks that pass relatively simple screens of interest to individual stock pickers. AAIIs Stock Investor Pro screening software is used to generate the First Cut listing.
This issues First Cut screens for growth stocks following the approach outlined by Louis Navellier in the January 2008 AAII Journal. Navellier describes the use of eight tried-and-true fundamental factors that help to identify companies with expanding sales and greater profit margins that are surprising the market with their financial strength.
The stocks that made this issues First Cut are exchange-listed companies with an upward revision of their consensus mean estimates for their current fiscal year within the past month. The second fundamental variable is earnings surprises. Passing stocks have reported quarterly earnings above the overall consensus estimate of Wall Street since the end of September 2007. Like earnings revisions, earnings surprises tend to persistthat is, once there is a surprise, more tend to follow.
Navellier likes to identify companies with year-over-year quarterly sales growth of 20% or higher. This filter was loosened, requiring only a 10% sales increase.
Earnings momentum is equally important, so the screen looks for stocks with expanding annual earnings over the last three years. To test for profitability, the screen looks for companies with positive free cash flow (cash from operations less capital expenditures and dividends) that are expanding their operating margins. A companys operating margin is simply its operating income (profits left after direct costs such as salary and overhead are subtracted) divided by net sales.
Navellier turns to the return on equity measure (income divided by equity or book value) to help identify dominant companies. The final screen looks for companies with return on equity that is above the norm for their industry.
The companies passing the First Cut are ranked by their earnings estimate revision over the last month.