Screening For 5 Star Growth Monsters

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I routinely use the Stock Screener on Motley Fool CAPS. The screener allows me to look for certain characteristics, and I also get the benefit of the CAPS community's combined intelligence. There is a screen I run on a regular basis. I call it the zero debt, 5 star growth monster. Quite honestly the screen is tough enough that I usually only get a few companies, and sometimes none. Today this screen returned one name Semtech (NASDAQ: SMTC). The screen has the following parameters:

  1. 0 debt-to-equity ratio

  2. current ratio 2 or better

  3. revenue growth 20%+

  4. EPS growth 25%+

  5. return on equity 15%+

These are tough numbers to meet. What I'm looking for is a company with good organic growth on both the top and bottom lines. I want a good return on equity, and a very strong balance sheet. Even if the company meets all these criteria, I also want the CAPS community to assign the stock the highest rating of 5 stars. With Semtech meeting every one of these criteria, we know the company has been doing well. However, unless you already bought the stock, that doesn't tell you very much. The real question is, how will this company do going forward?

Semtech is a technology company, specifically operating in the semiconductor field. The company serves the computing, communications, consumer, industrial, and military markets. In addition, the company already has an international footprint serving North America, Europe, and the Asia Pacific regions. The company sells for about 17.48 times 2012 expected earnings, and is expected to grow at about 12% in the next 5 years. The interesting part is, Semtech has been growing earnings at nearly 26% in the prior 5 years. This huge decline in earnings growth, is from analysts expectation of a cyclical downturn in the analog semiconductor market where Semtech specializes. I have to be honest, I think analysts are low in their estimates. Semtech has been consistently beating earnings estimates. The company has beaten estimates in the last 4 quarters by an average of 5.75%. With analysts lowering their estimates that the company is already beating, I see a good chance of these earnings beats continuing.

Since reported earnings don't always tell the whole story, we need to check Semtech's cash flow as well. When comparing cash flow, I like to use free cash flow per $1 of assets. This helps to even out the playing field between smaller and larger companies. Let's compare Semtech to two of their competitors, Analog Devices (NASDAQ: ADI) and STMicroelectronics (NYSE: STM).

As you can see, Semtech is right behind Analog Devices, and far ahead of STMicroelectronics. In the semiconductor industry, size is everything. Since Analog Devices has over 5 times the assets of Semtech, they can better leverage their spending across a bigger fixed cost base. The fact that Semtech is generating nearly the same amount of cash flow with much less in assets is impressive.

There are several other positive factors working in favor of Semtech going forward. We already know that Semtech has a solid balance sheet with no long term debt, and a current ratio of at least 2. This strong balance sheet allows Semtech to make earnings accretive acquisitions. The company recently acquired Gennum Corporation, and announced its intention to acquire Cycleo. Both acquisitions are intended to broaden Semtech's existing portfolio of solutions. These acquisitions add new growth opportunities with some short term challenges. In addition, Semtech obviously believes its stock is cheap, as the company bought back $20 million worth of stock at a price of about $22 a share. This helps to put a floor under the stock, and will help earnings per share in the future.

It looks like we may have found a true 5 star growth monster. Semtech has all the right numbers going for it: good earnings, cash flow, return on equity, and a solid balance sheet. The Motley Fool CAPS community are believers with a 5 star rating as well. It also doesn't hurt that 3 of the company's top officers and directors, own between $3 and $5 million in stock themselves. I'm going to be adding my green thumbs-up to SMTC today on CAPSCall. Let me know what you think in the comments section below.


The Motley Fool has no positions in the stocks mentioned above. MHenage has no positions in the stocks mentioned above. 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.

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