Monthly Archives

February 2020

A Closer Look at Seven Beaten-Down Tech Stocks

WHAT ARE WE LOOKING FOR?

Once again, the U.S Information Technology (IT) sector is outpacing the broader market. As of Feb. 21, The sector is up 10.7% while the S&P500 is up 4.4%, since the start of the year. The IT sector is well known for its high growth companies with high multiples while the value ones are often forgotten.

Today, we will be looking for value U.S large cap in the IT sector with the focus on companies that have been beaten by the market over the last year. Such stocks often offer great value, but sometimes the lower valuation is justified, so we need to be mindful of this caveat.

THE SCREEN

We screened the U.S companies from the IT sector by focusing on the following criteria:

  • Market capitalization greater than $10-billion;
  • Price earnings ratio between 0 and 27.5 – We want a company with positive earnings and one that is not too expensive;
  • Return on capital higher than 10% – We want to find profitable companies that have good return on investments;
  • A free-cash-flow-to-capital ratio higher than 0% – We want a company that generates positive free cashflow.

For informational purposes, we have also included recent stock price, dividend, one-year return and 24-month change in sale. Please note that some ratios may be reported at the end of the previous quarter.

MORE ABOUT INOVESTOR

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

WHAT WE FOUND

First, we compute the inverse of the price earnings ratio, also known as the earnings yield. Then, we calculate the average of each of the following: earnings yield, the FCF to capital, the return on capital and the 24-month sales growth for each company. Taken together, these calculations allow us to distinguish cheap companies with good fundamentals from those with bad ones. They are ranked accordingly, by a filter selection score.

Based on our selection filter, Seagate Technology and NetApp have the worst results as their fundamentals seem to support the low valuation. Arista Networks has the highest score of the list. The company offers a decent price earnings of 20 for a great 26% return on capital, 28% FCF to capital and 46% 2-year sales growth. On February 13th, Arista Networks reported a decline of 7.2% in Q4 2019 sales over Q4 2018, but the sales increased of 12.1% on a year over year basis.

For more details about Arista Networks stock and performance, please subscribe the Inovestor for Advisors platform for free: https://www.inovestor.com/en-CA/store/

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Ticker Name PRICE($) PRICE/EARNINGS EARNINGS YIELD (%) FCF / CAPITAL RETURN ON CAPITAL (%) SALES CH. 24M (%) PRICE BELOW 12M HIGH (%) 1Y PRICE RTN. (%) MKT CAP ($MIL.) DIV. YIELD (%) FILTER SELECTION SCORE
ANET-N Arista Networks, Inc. 228.28 20.3 4.9 28.1 26.0 46.4 31.1 4.0 17438 0.0 25.2
TWTR-N Twitter, Inc. 39.05 20.5 4.9 7.4 11.1 41.6 14.8 -3.2 30444 0.0 15.0
XLNX-Q Xilinx, Inc. 89.79 25.9 3.9 10.0 14.7 30.7 36.6 -24.5 22343 1.7 13.9
DELL-N Dell Technologies Inc Class 52.95 9.7 10.3 4.3 16.8 19.4 25.0 0.4 38601 0.0 10.2
CSCO-Q Cisco Systems, Inc. 46.85 18.2 5.5 8.8 12.5 7.2 19.6 -2.8 198691 3.1 7.2
NTAP-Q Netapp, Inc. 53.71 12.5 8.0 7.2 15.2 -2.6 31.4 -16.3 11924 3.7 5.0
STX-Q Seagate Technology Plc 54.75 8.8 11.4 4.1 14.1 -6.3 14.7 28.7 14290 4.8 3.0

Number Cruncher Extra: Arista Networks Inc

Following our article in the Globe and Mail, here is a Number Cruncher Extra for our readers about our top pick of the week Arista Networks Inc.

In our system, Arista Networks comes out with a positive outlook of 58. The performance score is close to 78 showing a strong performing company while the risk score of 47 displays a medium risk company. Arista Networks had sale growth of 30,8% annually and earnings growth of 74.7% in the last 5 years. The performance spread, which represents the difference between the return on capital and the cost of capital, grew by 12.3% in the last five years and is now close to 14%.

Here, we can see the company continues to add value through its EVA and the trailing twelve months NOPAT grew at almost every quarter. The NOPAT exploded in the last 5 years from $162.7M$ to 876.1M$. The return on capital is higher than 5 years ago, but the cost of capital increased also because of the volatility of the stock. The performance spread is still higher than 5 years ago showing a company that creates value for their shareholders.

 

Compared to peers, the stock does well overall and is often in the top of the list for the quality, value, growth and risk factor. first of a list of 10 companies, Arista Networks does particularity well on the quality factor.

Seeking solid transportation stocks in the wake of virus disruptions

WHAT ARE WE LOOKING FOR?

The Wuhan coronavirus has dominated news headlines for the past few weeks. Worldwide, there have been more than 40,000 cases of 2019-nCoV confirmed and more than 900 deaths reported, mostly in China. In the markets, the outbreak has affected multiple sectors, with many disruptions to manufacturing and trade. Notably, many stock prices in the transportation sector are down, especially ones operating in Asia.

Today, we look for companies in the transportation sector that have been affected during the virus outbreak, but which might still have solid fundamentals.

THE SCREEN

We screened the North American companies by focusing on the following criteria:

  • The transportation subsector of the industrials sector;
  • As the coronavirus developments have been dominant in the news for the past 20 days or so, we filtered stocks that are down at least 5 per cent during the same period;
  • A minimum market cap of US$1 billion, as we are targeting large-cap companies only;
  • A positive change in earnings for each share over the past 12 months;
  • A positive 12-month change in sales – a positive figure shows that there is growth and progress in the company’s operations;
  • A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows that the company’s profits are increasing at a faster and greater pace than its 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. For informational purposes, we have also included recent stock price, dividend yield and one-year return. Please note that some ratios shown may be as of the end of the previous quarter.

WHAT WE FOUND

We found 14 companies that were potentially affected by the coronavirus news but appear to have strong fundamentals. Here are three of note.

Air Canada: With a market cap of $12.1 billion, the stock price is down 10.7 per cent in the past 20 days. However, sales are up more than 7 per cent over the past 12 months, with a 525-per-centchange in the EVA metric. The company will be announcing their fourth quarter and full year 2019 financial results on Feb. 18.

Singapore Airlines Ltd.: The company is owned by Temasek Holdings (Private) Ltd., the government of Singapore’s sovereign wealth fund. The stock is down around 7 per cent in the past 20 days. However, Singapore remains a strong global financial hub and the government established strong measures to contain the virus. The stock has sound fundamentals and a good dividend yield of 3.3 per cent, it has low risk, with a beta of 0.44, and is currently trading below book value, with a price-to-book-value ratio of 0.7.

United Airlines Holdings Inc.: United Airlines has the second- biggest market cap on our list, at more than US$20 billion. The stock is down 9 per cent in the past 20 days. The company’s fourth-quarter results, released on Jan. 21, narrowly exceeded Wall Street’s estimates. Although the company doesn’t distribute dividends, it had an average earnings-a-share growth of 30.6 per cent over the past five years. Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

 

Company TICKER MKT CAP ($MIL.) 20D PRICE RETURN(%) SALES CHG. 12M (%) EVA CHG 12M (%) EPS CHG 12M (%) DIV. YIELD (5) RECENT PRICE ($) 1YR PRICE RTN.(%)
United Airlines Holdings, In UAL                                             20,158.07                                                     (8.97)                                                        4.74                                                   641.03                                                        3.85                                                            –                                                     79.48                                                   (14.29)
Scorpio Tankers Inc. STNG-N                                               1,263.43                                                   (38.28)                                                     14.90                                                   338.50                                                        5.40                                                        1.34                                                     21.73                                                     24.61
Seaspan Corporation SSW-N                                               2,704.24                                                   (10.75)                                                     12.07                                                   215.14                                                        0.30                                                        4.70                                                     12.54                                                     29.78
Sats Ltd SPASF                                               3,589.39                                                   (12.30)                                                     27.69                                                     86.92                                                        0.01                                                            –                                                        3.21                                                     (6.52)
Singapore Airlines Ltd. SINGF                                               7,288.54                                                     (7.34)                                                        2.84                                                   154.47                                                        0.01                                                        3.33                                                        6.15                                                   (15.20)
J.b. Hunt Transport Services JBHT-Q                                             11,951.09                                                     (5.51)                                                        6.39                                                     64.37                                                        0.27                                                        0.89                                                   112.52                                                        0.83
Hamburger Hafen Und Logistik HHULY                                               1,740.29                                                     (5.89)                                                        2.11                                                   363.62                                                        0.16                                                            –                                                     12.42                                                     10.63
Frontline Ltd. FRO-N                                               1,377.33                                                   (37.85)                                                     18.84                                               1,641.11                                                        2.00                                                            –                                                        7.80                                                     70.10
Fraport Ag Frankfurt Airport FPRUY                                               7,072.56                                                     (9.28)                                                     10.39                                                     16.66                                                        0.76                                                            –                                                     38.28                                                     (5.66)
Euronav Nv EURN-N                                               2,077.03                                                   (24.24)                                                     55.39                                                   746.57                                                        1.12                                                            –                                                        9.44                                                     26.99
Cosco Shipping Holdings Co., CICOF                                               4,413.43                                                   (16.28)                                                     36.74                                                     15.43                                                        0.02                                                            –                                                        0.36                                                     (7.90)
Comfortdelgro Corporation Li CDGLF                                               3,390.04                                                   (10.06)                                                        1.34                                                     53.85                                                        0.01                                                            –                                                        1.57                                                     (9.77)
A.p. Moller – Maersk A/s Cla AMKBF                                             25,105.01                                                   (12.01)                                                        6.99                                                     17.32                                                     28.23                                                        2.02                                               1,235.95                                                     (8.88)
Air Canada AC-T                                             12,096.75                                                   (10.69)                                                        7.77                                                   525.40                                                        2.66                                                            –                                                     45.46                                                     49.41

 

*Currency figures for AC in Canadian dollars

Seeking solid transportation stocks in the wake of virus disruptions

WHAT ARE WE LOOKING FOR?

The Wuhan coronavirus has dominated news headlines for the past few weeks. Worldwide, there have been more than 40,000 cases of 2019-nCoV confirmed and more than 900 deaths reported, mostly in China. In the markets, the outbreak has affected multiple sectors, with many disruptions to manufacturing and trade. Notably, many stock prices in the transportation sector are down, especially ones operating in Asia.

Today, we look for companies in the transportation sector that have been affected during the virus outbreak, but which might still have solid fundamentals.

THE SCREEN

We screened the North American companies by focusing on the following criteria:

  • The transportation subsector of the industrials sector;
  • As the coronavirus developments have been dominant in the news for the past 20 days or so, we filtered stocks that are down at least 5 per cent during the same period;
  • A minimum market cap of US$1 billion, as we are targeting large-cap companies only;
  • A positive change in earnings for each share over the past 12 months;
  • A positive 12-month change in sales – a positive figure shows that there is growth and progress in the company’s operations;
  • A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows that the company’s profits are increasing at a faster and greater pace than its 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. For informational purposes, we have also included recent stock price, dividend yield and one-year return. Please note that some ratios shown may be as of the end of the previous quarter.

WHAT WE FOUND

We found 14 companies that were potentially affected by the coronavirus news but appear to have strong fundamentals. Here are three of note.

Air Canada: With a market cap of $12.1 billion, the stock price is down 10.7 per cent in the past 20 days. However, sales are up more than 7 per cent over the past 12 months, with a 525-per-centchange in the EVA metric. The company will be announcing their fourth quarter and full year 2019 financial results on Feb. 18.

Singapore Airlines Ltd.: The company is owned by Temasek Holdings (Private) Ltd., the government of Singapore’s sovereign wealth fund. The stock is down around 7 per cent in the past 20 days. However, Singapore remains a strong global financial hub and the government established strong measures to contain the virus. The stock has sound fundamentals and a good dividend yield of 3.3 per cent, it has low risk, with a beta of 0.44, and is currently trading below book value, with a price-to-book-value ratio of 0.7.

United Airlines Holdings Inc.: United Airlines has the second- biggest market cap on our list, at more than US$20 billion. The stock is down 9 per cent in the past 20 days. The company’s fourth-quarter results, released on Jan. 21, narrowly exceeded Wall Street’s estimates. Although the company doesn’t distribute dividends, it had an average earnings-a-share growth of 30.6 per cent over the past five years. Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Log in to you account to get additional information in Number Cruncher Extra or to modify the original screener.

Portfolio Manager’s February Comment for January Results

The Canadian stock market as defined by the S&P-TSX posted another positive return for the month of January. This positive outcome took place despite global worries resulting from the coronavirus potential impact on the economy.

Last month, the S&P/TSX TR realised a 1.7% return, while the S&P500 TR was essentially flat and the MSCI ACWI ex USA declined by 2.7%. On a one-year basis, the S&P/TSX TR was up 15%, the S&P500 TR posted a 21.7% return while the MSCI ex USA lagged with a 10.5% return.

The best TSX sector for January was Information Technology up 9.4% followed by Utilities up by 7.6%. The worst sector for the month was Health Care down 2.6%.

The NQICAT was up 1.5% in January and 16.6% on a one-year basis. The NQICAT’s best performer was Brookfield Infrastructure (BIP.UN) up 11.1% closely followed by Constellation Software (CSU). BIP.UN was up in sympathy with other Utility stocks rallying as long term interest rate were coming down.

The worst performer was Parex Resources (PXT) the only oil stock of the portfolio. Every energy producer’s stocks price of the S&P-TSX Index came down in January. Energy producers were negatively impacted by a weaker outlook for oil demand, again caused by the fears around the Coronavirus and its impact on the economy.

2 stocks were sold and bought in the strategy in January. Norbord (OSB) was sold because its economic performance indicator turned negative. OSB cost of capital was higher than its return on capital as a consequence of its most recent quarterly report. OSB was replaced by Kirkland Lake Gold (KL). KL had the highest SP score in the material sector. Ritchie Bros. Auctionneers (RBA) was the other stock sold. The industrial sector EVA weight had having declined in the aggregate total profit. We had to sell the lowest SP score stock of the industrial sector which happened to be RBA. The consumer discretionary sector weight increased and MTY food group (MTY) was the stock with the best SP score in its sector that was not already in the portfolio.