2 Stocks That Refuse to Leave (My Screen)

Today, my search continues for some great small- and mid-cap stocks to add to my real-money "multivitamin" portfolio. On Friday I revealed the results for this month's Foolish 8 screen and came up with 11 candidates. Those stocks are being tracked on the F8's own CAPS page.

Today, we turn to the Modified Foolish 8.

Mod-8 101
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, or AAII, the Mod 8 has had outstanding average annual returns of 14.6% from January 1998 through January 2012. The S&P 500 averaged just 2.2% annually over that period. 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 in real life but that we will do while tracking our results.

Two at the top
(NYS: SWI) and Altisource Portfolio Solutions (NAS: ASPS) are the only two companies passing the screen this month -- their fourth consecutive month alone in the limelight! I apologize to the Mod 8's loyal followers, but that's the way the screen door swings sometimes.

Four companies that just missed because of the ROE requirement are Main Street Capital (NYS: MAIN) , HFF (NYS: HF) , Liquidity Services (NAS: LQDT) , and TGC Industries.

Besides passing the various screening criteria, all these companies have debt under control (or no debt at all) and strong five-year growth estimates. Only Main Street pays a dividend, and it has a juicy 7% yield.

Onward and upward
I'm tracking and scoring each one of my monthly screens now. Altisource and SolarWinds remain the lone entries on the Modified Foolish 8 CAPS page. Add the page as a favorite to keep track of things along with me.

Also, make sure you balance your risky small caps with some large, solid, dividend-paying stalwarts. Find some of the Fool's favorites in our special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." It's available free, by clicking here.

At the time thisarticle was published Fool analyst Rex Moore tweets but is not a twerp. He runs a real-money portfolio based on his screens. He owns no companies mentioned here. Motley Fool newsletter services have recommended buying shares of Liquidity Services. The Motley Fool has a disclosure policy.
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