Monthly Archives

May 2020

Real estate investments to cushion your portfolio

The increased uncertainty in the economy and volatility in the stock markets is causing investors to stumble on their investment decisions and looking to diversify their portfolios.

It is widely viewed that real estate is recession-proof. While the large capital investment is the common hurdle that prevents most investors from dipping their feet in the water, we look at real estate investment trusts (REITs) as the welcoming alternative. REITs enable investors to diversify their portfolio by owning shares of real estate properties with the desirable feature of liquidity while earning some steady monthly income.

WPT Industrial Real Estate Investment Trust (“the REIT”) (TSX: WIR.U, WIR.UN) focuses on acquiring, developing, and managing industrial properties primarily located in the United States.

Diving into the fundamentals using Inovestor’s Stock Guide platform, the REIT has demonstrated strong performance YOY with an upward trending revenue and controlled cost of operations. With a decent return on invested capital, the company appears to have no major issue meeting its debt obligations as evidenced by several historical debt-related ratios, a healthy interest coverage ratio, and a comfortable level of cash. It is also worth noting that the operating revenues do not follow the growth of assets and debt. As a result, asset turnover is declining while the return on assets is increasing.

2019-12-31 2018-12-31 2017-12-31 2016-12-31 2015-12-31
Accounts Receivable / Days 8.255 7.776 7.658 7.448 6.659
Acid Test 0.194 0.219 0.188 0.549 0.248
Assets to Debt 4.98 3.185 2.868 2.514 2.341
Assets to Debt + EECD 4.98 3.185 2.868 2.514 2.341
Cash Flow to Debt 0.248 0.158 0.159 0.152 0.15
Cash Flow to Debt + EECD 0.248 0.158 0.159 0.152 0.15
Current Ratio 0.194 0.219 0.188 0.549 0.248
Debt to Equity 0.366 0.605 0.662 0.835 1.631
Debt + EECD to Equity – EECD 0.366 0.605 0.662 0.835 1.631
Debt Ratio 0.268 0.377 0.398 0.455 0.62
Debt Ratio + EECD 0.268 0.377 0.398 0.455 0.62
Dividend Payout  (Common) 44.504 67.994 57.298 68.935 61.823
Dividend Yield 7.159 8.044 7.516 8.599 8.339
Earnings Yield 16.749 11.727 13.114 12.4 13.435
Interest Coverage 4.944 3.771 4.811 3.576 2.584
Net Profit 83.347 53.175 64.199 47.791 31.977
Price to Book Value 0.798 0.772 0.855 0.804 0.827
Price to Cash Flow 7.614 7.85 7.232 5.679 3.375
Price to Invested Capital 0.584 0.481 0.515 0.438 0.314
Price to EBITDA 4.68 6.204 6.041 5.808 4.547
Price to Sales 4.977 4.538 4.896 3.853 2.372
Price to Earnings 5.971 8.528 7.625 8.064 7.443
Return on Invested Capital 10.485 7.387 7.574 6.749 6.911
Return on Common Equity 11.555 7.08 9.537 7.488 7.506
Return on Assets 6.097 4.378 5.148 4.154 2.868

 

Change in supply chain management will play a key role in the real estate allocation in a portfolio. Given that WPT Industrial Real Estate Investment Trust is engaged mostly in the Industrial sector and the US President’s call to reclaim the global supply chain back in the U.S, investing in companies that are vertically integrated seems to be a good strategy. Intuitively speaking, Industrial REITs will benefit from manufactures relocating operations to North America in search of warehouse and distribution centers

StockGuide is the world’s most powerful, accurate, and thorough software for mining and screening critical financial data on Canadian companies.

Learn more about StockGuide and its critical features.

Six U.S. Industrial large caps with economies of scale

What are we looking for?
The United States ISM Producing Managers Index dropped to 36.1 in April due to the COVID-19. The manufacturing companies were hit harder, but their valuations also dropped further than the other sectors. The U.S. Industrial sector fell by 27.5% compared to 12.7% for the S&P 500.

Today, we will look at U.S. large caps in the industrial sector. During the 2008 financial crisis, these companies were hit hard but did incredibly well shortly after. With the fiscal and monetary stimulus put in place to mitigate the COVID-19 combined with the reopening of factories, the history could repeat itself once again.

 

The screen

We screened U.S. companies focusing on the following criteria:

  • Market capitalization higher than 10 billion;
  • Earnings per share (EPS) growth 5-year average higher than 5% – We want a company that improved their profitability in the past 5 years;
  • Net operating profit (NOP) growth over 24 months higher than 5% – The EPS can be distorted by accounting classifications. We also use this variable to ensure we have a company that grew their bottom line;
  • Positive sales growth over 24 months – a great company should have been able to grow its revenue in the past 2 years;
  • Net operating profit (NOP) growth over 24 months must be higher than 24 months sales growth – We want a company that displays economies of scale;
  • Future growth value (FGV) lower than 50% – We can separate a company in 2 parts: the current operating value and the future growth value. The current operating value represents the value of the business today if it had no growth. The FGV is the intangible part of the company that we buy. We don’t want it to be too high.

For informational purposes, we have also included recent stock price, dividend yield and one-year price return.

 

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 and U.S. stocks and American depositary receipts).

TICKER NAME PRICE ($) MKT CAP ($MIL.) SALES CH. 24M (%) NOP CH. 24M (%) FGV (%) EPS GROWTH AVG 5Y (%) DIV. YLD. (%) 1Y RTN. (%) SECTOR
LMT Lockheed Martin Corporation 377.54 105601 18.4 168.7 25.7 14.5 2.5% 10.4% Industrial – Capital Goods
AME Ametek, Inc. 83.24 19098 13.6 31.4 46.7 11.3 0.9% -2.2% Industrial – Capital Goods
CAT Caterpillar Inc. 108.61 58861 5.1 114.9 22.2 8.5 3.6% -6.1% Industrial – Capital Goods
CMI Cummins Inc. 162.03 23867 5.5 135.3 -10.2 7.9 3.2% 0.5% Industrial – Capital Goods
PH Parker-hannifin Corporation 165.14 20307 1.7 28.7 30.1 5.7 2.1% 1.3% Industrial – Capital Goods
DE Deere & Company 137.9 42304 26.5 48.6 23.0 5.3 2.2% 1.9% Industrial – Capital Goods

 

What we found
For those who don’t have any ethical issue with armament, Lockheed Martin Corporation has the highest growth in EPS in the last 5-year period. The company has the second highest sales growth and the highest NOP growth of our list. In their last earnings report, they maintained their previous guidance for EPS, operating profit and cash from operations.

Ametek Inc., a global manufacturer of electronic instruments and electromechanical devices, demonstrates great economies of scale. In the last 5-year period the company converted a 6.7% growth in sales into a 15.2% increase in EPS. In their first quarter sales declined by 6.6% over the previous first quarter, but it managed to increase their adjusted operating margin by 100 bps.

Cummins is organized into distinct business segments including engine, components, distribution and new power. This company is the cheapest of our list based on the FGV while displaying decent past results and big economies of scale. A negative value for the FGV means the company is selling at a discount of the current operating value.


We used this customized screener for the article.
For more details about these industrial stocks, 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.

 

5 U.S. banks with solid balance sheets

What are we looking for?

The Canadian banking sector is widely considered to be one of the best and safest banking systems in the world, which explains why Canadians are heavily invested in the six major banks. However, the financial sector, represents 32 per cent of the S&P/TSX Composite Index. To diversify their portfolios, investors might want to consider investing in the U.S. banking sector. In the aftermath of the financial crisis, U.S. banks have become better capitalized, with an increased focus toward a more sustainable business model. Today, we will be looking at five dividend-paying U.S.-based banks with solid balance sheets.

The screen

Our screen of the banks’ subsector of the U.S. financials sector is based on the following criteria:

Market cap of at least US$10-billion;

-A positive EVA figure. Economic value-added (EVA) is a measure of true economic profit created by a company. EVA is calculated by subtracting the Capital charges from the NOPAT (Net Operating Profit After Taxes). The higher the economic value-added is, the more value a company is generating for its investors;

-An EPI figure of at least one. The economic performance index (EPI) is the main indicator to identify how much wealth is redistributed to the shareholders. The higher the figure, the better, and a negative EPI means that the company is not covering its costs of capital;

-Dividend yield of at least 3 per cent. We are looking for banks that consistently share their profits with the shareholders;

Positive earnings per share. We are looking for profitable companies only;

-A price-to-intrinsic value of between 0.5 and two. Price/IV is the price of the stock divided by the intrinsic value of the stock. We are avoiding overvalued and value trap stocks.

-Long term debt-to-equity ratio below two: We are looking for banks with solid bank sheet and low long term debt;

-Current SP score of at least 55: The SP Score is a proprietary scoring system based on StockPointer’s model. It’s a 12 factors algorithm with a focus on quality and value. This metric represents the overall performance of a company by considering multiple risk and performance factors. A high score indicates a high quality stock trading at a reasonable price. (The score range between zero and 100)

For informational purposes, we have also included recent stock price and one-year return. Please note that some ratios may have been reported at the end of the previous quarter.

What we found

TICKER COMAPNY RECENT PRICE ($) EVA ($MIL.) MKT CAP ($MIL.) EPI LT DEBT DIV. YIELD (%) Price / IV EPS CURRENT SP SCORE 1YR PRICE RTN.(%) LT DEBT / EQUITY
JPM-N Jpmorgan Chase & Co. 93.25 1029.82 284090.00 1.00 299344.0 3.89 1.08 8.88 65 -17.48 1.05
USB-N U.s. Bancorp 34.94 1214.38 53215.13 1.15 52298.0 4.73 0.93 3.93 65 -31.55 0.98
NTRS-Q Northern Trust Corporation 75.47 227.54 15700.09 1.16 4142.2 3.58 1.18 6.73 64 -19.68 0.26
DFS-N Discover Financial Services 41.37 806.58 12672.10 1.41 26098.0 4.82 0.67 6.74 68 -47.27 2.06
SYF-N Synchrony Financial 18.51 1178.58 10798.20 1.45 16063.0 5.41 0.54 4.46 58 -42.92 1.49

Five names made today’s list, ranked by market cap, JPMorgan Chase & Co., which shows the highest EPS, has been growing its revenues constantly since 2015. Although the bank’s performance spread (ROC – COC) was negative from 2016 to 2018, it has been positive for the past two years, which is a good indication for shareholders.

U.S. Bancorp is also a big player in the banking sector with a market cap of US$51-billion. The bank has beaten or matched EPS estimates for the past five years. The bank missed its last earnings estimate because of loan defaults related to COVID-19. With a current operating value of US$55.8-billion, the bank is trading at an 8 per cent discount compared with its current market value. At a current price of $35 per share, it’s worth considering adding it to your portfolio.

For more details about JPMorgan and U.S Bancorp stock and performance, please subscribe the Investor for Advisor platform for free

For readers with an Inovestor for Advisors account, Here is the screener we used

Portfolio Manager’s May Comment for April Results

The S&P/TSX increased by 10.8% in April and the S&P500 increased by 12.8% while the MSCI ACWI ex USA gained 7.6%. At the end of the 12-month period ending April 30th, the S&P/TSX was posting a negative return of 7.9%. Over the same 12-month period, the S&P500 gained 0.9% while the MSCI ACWI ex USA posted a decline of 11%. For the U.S and Canadian markets April results were the best monthly returns of the past decades. Over the past 12 months, the strong performance behind the U.S equity market can be explained by its 5 largest technology names (Microsoft, Facebook, Amazon, Apple and Google).
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The best TSX sectors for the month of April were Materials up 33%, followed by Information Technology up 29.3%, and Consumer Discretionary up 20.1%. The worst performing sectors were Telecommunication Services (-0.3%), Financials (0.9%) and Utilities (3.7%).

The best monthly performers in the portfolio were Kirkland Lake Gold (39.1%) and Parkland Fuel Corp (33.1%). At the opposite, the weakest contributors were Great-West Life Co, which was down 5.7% and Royal Bank of Canada down 1.8%.

4 stocks were sold and bought in the strategy, in April. For this rebalancing, the model required an exposure reduction to 2 sectors namely Consumer Discretionary and Energy. MTY Group (MTY) was sold for several reasons including its negative exposure to the COVID-19 pandemic, Parex Ressources (PXT) was sold as weak oil prices put severe pressure on its margins.

The model called for the selling of Brookfield Asset Management (BAM.A) and Brookfield Infrastructure Partners L.P. (BIP.UN) due to a deterioration of their respective performance scores.

The model also required an increased exposure to Materials and Financials. The names that made it into those sectors were Winpak (WPK) and First National (FN). The other 2 names purchased in this rebalancing were Fortis (FTS) as a replacement for Brookfield Infrastructure Partners L.P. (BIP.UN) and Sun Life Financial as a replacement for Brookfield Asset Management (BAM.A).