Only 1 Stock Passes This Screen


This article is part of ourRising Star Portfolio series.

Today, my search continues for some great small- and mid-cap stocks to add to my real-money "multivitamin" portfolio. Yesterday, I revealed the results for this month's Foolish 8 screen and came up with 12 candidates. Today, we turn to the Modified Foolish 8.

Mod squad
For a refresher, here's a summary of the changes I made to turn the Foolish 8 into the Mod-8:

  • Raised the revenue cap to $900 million or less.

  • Took the $25 million limit off the daily dollar volume requirement, making it simply $1 million or greater.

  • Loosened the relative strength requirement to 50 or greater.

  • Required not only positive cash flow, but also positive free cash flow.

  • Required a price-to-free-cash-flow-to-cash-flow growth (PFCF-to-FCF growth) multiple of one or less. I have tweaked the screen to use actual FCF growth over the past year.

  • Required greater than 15% return on equity over the past four quarters, and for each of the past three fiscal years.

According to the independent American Association of Individual Investors, the Mod-8 has an average annual growth rate of 20.2% from January 1998 through May 2011. The S&P 500 averaged 2.5% annually over that period. (Disclaimer: The AAII methodology involves buying a stock the month it appears on a screen and selling when it's off -- something we'd never do. Still, this performance points to the screen's strong potential.)

Only one company passes the screen this month.


Market Cap (millions)


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LSB Industries (NYS: LXU)


HVAC and chemical products


Source: Capital IQ, a division of Standard & Poor's. (NAS: NTES) and iGATE (NAS: IGTE) dropped off the screen from last month. Digging deeper:


Insider Ownership

Forward P/E



Net Margin

LSB Industries






Source: Capital IQ, a division of Standard & Poor's.

Onward and upward
In the coming days, I'll take a close look at this company, as well as the small caps that passed yesterday's Foolish 8 screen. I'll soon report back on whether any of them are a good fit for the portfolio. So far, I've bought two stocks off these screens, lululemon athletica (NAS: LULU) and Kulicke & Soffa (NAS: KLIC) .

If you're interested in keeping up with any of these companies, add them to your free watchlist and gain access to The Motley Fool special report, "Six Stocks to Watch from David and Tom Gardner."

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At the time thisarticle was published Fool analyst Rex Moore tweets but is not a twit. Of the companies mentioned here, he owns shares of lululemon athletica. The Motley Fool owns shares of lululemon athletica and Kulicke & Soffa Industries.Motley Fool newsletter serviceshave recommended buying shares of lululemon athletica and Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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