Don't be fooled by name of this small-cap screen

What are we looking for?

Small cap stocks with the potential for big investment returns.

More on our screen

This screen comes from Validea Canada (The Globe and Mail has a distribution agreement with Validea.ca, a premium Canadian stock screen service). Known as the "Foolish 8" small-cap screen, it's one of 14 model portfolios that Validea has developed based on the investing approaches of some of history's most successful stock pickers.

Don't let the name deceive you; there's nothing to be feeling foolish about here. It's formulated on the strategies of brothers David and Tom Gardner, the founders of the Motley Fool website, and has been the best performing of the portfolios. Since inception in 2003, it's returned 250 per cent versus 37 per cent for the S&P 500. So far this year, it's gained nearly double that of the index.

The Gardners had a goal of identifying small, fast-growing companies with solid fundamentals using eight main attributes that investors should look for in small companies. They put particular emphasis on finding stocks with an earnings growth rate that is greater than the stock's price to earnings ratio – what is commonly known as the PEG ratio.

Other criteria include:

-Trailing 12-month profit margin must be at least 7 per cent;

-A company must outperform 90 per cent or more of the market for the past year (known as relative strength – the higher the number, the better);

-Revenue growth of at least 25 per cent compared with a year ago;

-Net income growth of at least 25 per cent compared with a year ago;

-Insider ownership of at least 10 per cent;

-Positive operating cash flow;

-Daily dollar volume of less than $25-million (U.S.);

Validea assessed each stock by giving it a "pass" or "fail" on each criteria and then assigns a strategy score; the closer to 100, the better.

Today, we'll take a look at the top 10 U.S. companies with annual sales under $500-million that made the screen. Next time, we'll reveal the Canadian stocks.

What we found

Stocks from a variety of sectors. One name will jump out to Canadians: Lululemon Athletica. The interlisted yoga-inspired retailer made the U.S. top 10 screen because there was greater data availability for the U.S. listing, explained Justin Carbonneau, vice-president of Validea.