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Breaking big: Behind the search
How we got from thousands of small cap stocks, to just six.
August 1, 2005: 10:15 AM EDT

NEW YORK (CNN/Money) - To find small companies at the beginning of a growth phase -- that is, that have the change to "break big" -- we did a stock screen with data from Thomson/Baseline.

Here is the criteria we used:

Market capitalization While some say only stocks under $1 billion should be considered small caps, we decided to raise the level to $2 billion. To rule out the smallest stocks, we set a sales minimum of $100 million over the latest four quarters.

Historical performance. To qualify, companies had to report average sales growth of at least 14 percent over the past three years and earnings growth of at least 20 percent over the same period of time.

Long-term growth. We only considered companies that expect to post year-over-year earnings gains of at least 14 percent in 2005 and long-term annual earnings growth of 14 percent as well. To make the cut, they also have to expect to post year-over-year sales gains of at least 15 percent.

Debt. Growth is good, but not if to comes with too much debt. So companies had to have a long-term debt to total capitalization ratio that was less than 32 percent -- the S&P 500 average.

Valuation. We didn't want stocks that were too pricey, so our picks trade at no more than 2 times their projected long-term earnings growth rate, using price-to-earnings ratios based on 2005 earnings estimates.

Location. Finally, we decided to keep the list all-American, and ruled out companies that trade ADRs on U.S. markets.  Top of page


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