Screening for Future Growth - thru R&D

by Wayne Ferbert on April 27th, 2012

If you remember, we posted this story 2 weeks ago on April 12th. I am going to be on Fox Business News at 2 pm et to discuss it today. Here is the screening criteria reposted for those interested.

The companies poised to come out of the recession with strength are the ones that invested in their infrastructure and Research & Development (R&D) even in the face of a bleak economy. It would have been very hard to commit to increased R&D spend in 2008 & 2009 given the market turmoil. But some companies did.

Those companies are positioned today to reap the benefits of those investments in two ways: increased market share and more efficient processing/scale. The companies best positioned to benefit are the ones that are small enough and nimble enough to be good at executing on R&D investment. Of course, you might also look for the companies that have a strong return on equity – in other words, they have a history of producing good results from their investments.

So, we ran a screen to find these companies. The specific screening criteria was:
  • Stock must trade on US exchange - and not a pink sheet or bulletin board exchange
  • Mid cap in size - as defined as market cap between $1 billion and $4 billion
  • 3,000 or fewer employees - to meet the nimble standard for executing on R&D
  • R&D spending must have increased consistently thru crisis OR increased in each of the last 2 years WHILE being greater than the 2007 levels (i.e. pre-crisis levels)
  • R&D spending must be significant part of business - at least $25 million annually
  • Company cannot be a bio-tech or pharmaceutical company
  • Revenues must have grown in trailing 12 months and Company must generate a positive operating income
  • Company must have a Price to Earnings (PE) ratio that is less than its industry - i.e., it trades at a discount
  • Company must have a Return on Equity (ROE) that exceeds its industry - in other words, it has a history of making good R&D decisions
  • Lastly, because we want room to make money, we eliminated all stocks close to their 52 week high - they needed to be at least 10% below their 52 week high

The result was just six companies:
*    New Market (NEU)
*    Adtran (ADTN)
*    Netgear (NTGR)
*    Coherent (COHR)
*    VistaPrint (VPRT)
*    Shanda Games (GAME)

Many of these companies are fairly well known in the mid-cap space. A few are even well known in the household like NetGear and VistaPrint.

All six of these companies have options that trade on the stock – meaning you can technically Buy and Hedge them. However, the options market for Coherent and Shanda Games both look a little shallow. You might want to consider only the four that have a healthier options market.

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