March's Foolish 8 Stocks

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This article is part of ourRising Star Portfolios series.

I'll be gathering more small- and mid-cap candidates for my Rising Star "multivitamin" portfolio over the next few days via my Foolish 8 and modified Foolish 8 screens. Today I 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:

  1. Revenues: $500 million or less.
  2. Earnings and sales growth: 25% or greater.
  3. Netprofit margin: 7% or greater.
  4. Daily dollar volume: $1 million-$25 million.
  5. Insider holdings: 10% or greater.
  6. Share price: $7 or greater.
  7. Relative strength: 90 or greater.
  8. Operating cash flow: a positive number.

The contenders
This month, 10 companies passed the screen:

Akorn (NAS: AKRX)

$1,067

Pharmaceuticals

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Altisource Portfolio Solutions

$1,495

Real Estate Management and Development

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American Vanguard (NYS: AVD)

$487

Chemicals

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Bank of the Ozarks

$994

Commercial Banks

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ExlService Holdings (NAS: EXLS)

$850

IT Services

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Hi-Tech Pharmacal

$530

Pharmaceuticals

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Liquidity Services

$1,272

Internet Software and Services

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MercadoLibre (NAS: MELI)

$4,107

Internet Software and Services

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Ocwen Financial

$2,070

Thrifts and Mortgage Finance

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SolarWinds

$2,647

Software

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Source: S&P Capital IQ.

Akorn is making its first appearance on the Foolish 8 screen. It makes and markets various pharmaceutical products, with the core of its business tied to the ophthalmic, hospital drugs and injectables, and contract services segments. It has made numerous small acquisitions of companies and products. On the heels of a $120 million convertible debt offering, it's likely more is on the way. I do like the growth potential here.

American Vanguard is also new to the screen, and gives me probably the only chance I'll ever have to talk about molluscicides, or snail bait. That's just one of the specialty chemical products this company makes for the agricultural market. It's currently riding some strong revenue growth, but I worry about its ability to fend off larger competitors.

ExlService is back on the screen after a six-month absence. The back-office operations outsourcer took a hit in September after management announced a 4-million-share, follow-on offering. It has recovered from that, and its 43% year-over-year revenue growth is attracting some attention. I worry about goodwill and other intangibles making up 34% of its total assets, however. As I've explained in my ongoing goodwill series, anything over 20% means you need to be very comfortable with management's growth strategies and capabilities.

Following up...
Last month I told you I had MercadoLibre and Fortinet (NAS: FTNT) on my short list, hoping to catch a better price. Both, however, continue their strong performance:

One thing I hope my real-money portfolio demonstrates for you is patience. I've got plenty of it, and will wait to see if either of these gives us a better price in the months to come.

I hear CAPS calling
I'm tracking and scoring each one of my monthly screens now, so we can see exactly how they're performing. We refer to it as a CAPScall around these parts, and the Foolish 8 has its own page. Just add it as a favorite to keep up.

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 businesses, add them to your free Watchlist by clicking the "add" button in the far-right column of the table. You can also follow me on Twitter, and check out the multivitamin discussion board.

At the time this article was published Fool analyst Rex Moore reminds you that time holds the winning hand. He owns no companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Liquidity Services and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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