The defensive nature of value investing makes it a go-to strategy during an economic or market downturn. Today, I look for value companies that are not necessarily trading at a discount but rather at a reasonable price, what we call “quality” investing. We are screening the Canadian market with an emphasis on quality companies – those that perform defensively compared with others, regardless of market volatility.
We screened the Canadian universe by focusing on the following criteria:
Market capitalization greater than $1-billion;
Positive one-year return (as of last month’s end);
Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
Positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is the return on capital to cost of capital;
Average annual return on capital (ROC) over five years must be greater than 10 per cent;
Future-growth-value-to-market-value ratio (FGV/MV) is between 40 per cent and minus 70 per cent. The chosen range was selected to eliminate stocks that are at an exaggerated premium or discount as that would increase the risk. This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk.
Read more in this articlewritten by Noor Hussain, Analyst & Account Executive at Inovestor Inc.