A Chance to Make Ten Times Your Money Using my Powerful Forward Earnings Forecaster

The Forward Earnings Forecaster uses a series of stock screens to filter out junk stocks, pinpointing the fastest growing stocks (according to the stock’s estimated growth rate) trading at the best price.

Profit Power of a Stock Screen

A stock screen, in a nutshell, consists of a database of stocks. The screen we use at Break Away Investor focuses on domestically traded equities, all 8,000-plus of them.

The Forward Earnings Forecaster finds the best value stocks there are. It runs a series of “screens” on stocks to find the very best value stocks with the highest potential for capital appreciation.

Typically, these are small-cap stocks - companies with a small stock market capitalization - that are excellent targets for accumulation by institutions. This is the kind of stocks that can return eight to ten times your investment… very quickly. If you pick the right one, that is.

To locate the stocks with the biggest potential, we begin with the universe of all publicly traded stocks. Theoretically, they’re all candidates for investment. There are over 8,000 in all. But we don’t want just any stock, so we put them through a series of screens to get only the good ones.

Step 1: Get rid of the huge companies : Accordingly, the first screen we apply screens out all big cap stocks. Why? Because stocks with market caps over US$2 billion are too big to move fast. They may be good long-term investments (and then again they may not), but either way, it’s highly unlikely that they’ll produce the kind of returns we want. We want only those stocks having market caps under US$500 million. The highest growth is almost always found in small-cap stocks.

This first screen yields about 5,200 stocks. But it’s only the beginning.

Step 2: Get rid of fully valued stocks: Once we have our “pool” of small-cap stocks, the next thing we do is to screen for stocks that currently trade at a price-to-earnings (P/E) ratio of less than 10.

Again, this may strike you as very “old school”: After all, the traditional definition of value strives to quantify it by bringing it into relation to the price of the stock. If the price of a stock exceeds its earnings by a long shot, it is an indicator that the current price is based on speculation on potential increases in price, not on the amount of earnings an investor can reasonably expect to make from the profits a company actually generates for its shareholders.

There are two reasons to use this traditional measure of value for a dynamic market trading strategy. For one, a stock with a P/E of less than 10 is a good buy just on the face of it. You’re likely to get a good return on your investment even if the stock price stalls.

Number two, if a stock is way below the average P/E ratio of the market, it is a top candidate for growth. Stocks tend to move toward the average. Look at it this way: If you’re way above it, you’re a top candidate for a fall. If you’re way below it, you’re a top candidate for a rise - especially since a large number of investors will always look to value.

So if the Dow is trading at an average P/E of 25, as it currently is, we don’t want to buy stocks that trade over that. In fact, we want stocks that are way under it. That’s why we look for stocks with a P/E of less than 10.

This second step of the process yields about 1,500 stocks. All of these are small-cap stocks with a solid price-to-earnings ratio.

But P/E multiples are only really meaningful if they’re compared to something - something that suggests that the stock is indeed very undervalued. And that “something” is called profit growth or earnings growth.

You see, many stocks that trade at low P/E multiples trade there for a reason. Sure, they might be very profitable as indicated by the very P/E multiple. But it frequently means that a company may have stopped growing as a business.

But we want just those stocks that will give us significant capital appreciation - and we want our money to grow rapidly. And that means finding stocks that are undervalued and growing their profits. These are the small-cap stocks that are most likely to be targeted for accumulation by institutions, which would place them in a position to skyrocket as millions of shares are gobbled up. The way we find them is to run another screen on the 1,500 stocks that the P/E screen produced.

Step 3: Get rid of stocks that aren’t growing fast enough: We screen these stocks for companies that have grown earnings by 25% or more for at least three years. Now we’re getting down to the real value stocks - the cream of the crop. The ones with real strength. The best values out there, stocks that are going to grow like weeds in a vacant lot.

Believe it or not, if it’s done correctly this process reduces the field - the entire field of 8,000-plus stocks - down to about 30 stocks. That’s right: 30!

Now we’re in what we call the “sweet spot,” down where the PEG ratio is of critical importance.

The secret of the PEG ratio

PEG is an acronym for P/E-to-earnings growth. It’s a ratio that measures whether a company is fully valued or undervalued based on its own earnings growth. To get the ratio, you divide the P/E by earnings growth. For instance, if a stock is growing its EPS (earnings per share) by 20% per year, the stock should trade at a P/E multiple of 20. That would be a PEG ratio of 1.

A stock that is growing its EPS 20% per year but trades at a P/E below 20 is said to be undervalued. So if the PEG ratio is less than 1, it’s undervalued.

This last screen further reduces the field to about one or two stocks a month. But these two stocks represent the best and most solid chances for rapid price growth at that moment.