The unresolved and further complication of the Sino-U.S. trade dispute hit the markets once again last week, which I believe will cause higher volatility in the markets in the short run. On Friday, U.S. President Donald Trump confirmed that, for now, no business will be made with Chinese telecom giant, Huawei, and that he is not ready to finalize a trade deal with China. This follows China’s decision to stop purchasing American agricultural products. Therefore, for the Globe and Mail this week, we screened the U.S. market to identify companies with low volatility and sustainable operations that can withstand further potential market turmoil.
This strategy screens the S&P 500 using the following criteria:
- A market capitalization of US$10-billion or more;
- A beta of one or less. A stock with a beta less than one is considered less volatile than the market;
- A five-year average return on capital (ROC) greater than or equal to 10 per cent, reported as of last quarter’s end, and a positive change in the 12-month return on capital figure;
- A minimum free-cash-flow-to-capital ratio of 5 per cent. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to do such things as stimulate growth, distribute or increase dividends, or reduce debt;
- A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is 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;
- A cost of capital less than 10 per cent, reported as of last quarter’s end.