Monthly Archives

April 2021

These 10 U.S. large-cap stocks demonstrate consistent, solid profitability

WHAT ARE WE LOOKING FOR?

U.S. large caps with high profitability, below-average risk and attractive valuations.

We use the economic performance index (EPI) and relative EPI to help us find stocks with a healthy adjusted profitability. Essentially, we are willing to tolerate a bit less profitability if the risk is lower or if the valuation is attractive. While we may not find the most profitable U.S. companies, we believe they will have other interesting characteristics that totally compensate for the slightly lower profitability.

THE SCREEN (access and save it on the Inovestor for Advisors platform)

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

  • Market capitalization higher than US$10-billion;
  • EPI of two or higher – this is the return on capital divided by the cost of capital;
  • Relative EPI of 0.6 or higher – this ratio uses the return on capital adjusted for its market capitalization divided by the cost of capital;
  • Positive three-month percentage change in the economic value-added (EVA) metric. The EVA gives us a sense of how much value the stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the cost of capital. We want a company with improving fundamentals;
  • One-year sales growth higher than 2 per cent – we want a company that manages to grow at least at the rate of inflation.

For informational purposes, we have also included five-year mean return on capital, most recent return on capital, five-year maximum drawdown, price-to-earnings ratio, dividend yield, one-year price return, and recent stock price. The five-year maximum drawdown is the largest percentage decline, from peak to trough, seen over the past five years. Please note that some ratios may be shown as of end of 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.

WHAT WE FOUND

U.S. large caps with high profitability, below-average risk and attractive valuations

TICKER NAME PRICE MKT. CAP ($MIL) EPI REL. EPI EVA GRTH. 3M (%) 1Y SALES GRTH. (%) ROC (5Y MEAN, %) ROC (%) 5Y MAX DRAWDOWN (%) P/E DIV. YIELD (%) 1Y PRICE RTN. (%)
CLX-N Clorox Company 190.73 23990 4.5 0.9 27.6 22.7 22.4 25.3 -25.1 20.0 2.3 -0.9
PGR-N Progressive Corporation 98.76 57790 4.4 1.2 98.2 9.3 25.3 38.8 -22.3 10.2 0.4 20.5
AZO-N Autozone 1495.84 32960 3.7 0.7 10.3 10.9 25.1 29.3 -42.1 19.0 0.0 51.4
VRTX-Q Vertex Pharmaceuticals 219.39 56780 3.6 0.6 18.0 50.3 22.2 28.7 -31.7 21.3 0.0 -19.7
REGN-Q Regeneron Pharmaceuticals 502.6 53840 3.2 0.9 63.4 8.1 22.8 23.5 -48.1 16.5 0.0 -11.5
BIO-B-N Bio-rad Laboratories 600.87 18570 2.7 0.6 30.2 10.1 9.3 19.4 -31.9 4.8 0.0 44.8
DG-N Dollar General 216.74 51860 2.6 0.8 12.9 21.6 12.6 16.2 -30.8 20.4 0.8 21.1
GIS-N General Mills 61.3 37390 2.4 1.3 46.2 11.1 10.9 12.1 -49.5 14.9 3.3 0.9
TGT-N Target 208.55 103990 2.3 0.6 32.3 19.8 12.4 16.7 -40.2 24.1 1.3 91.4
PKI-N Perkinelmer 133.16 14920 2.0 0.7 80.5 31.2 9.9 16.2 -34.4 20.5 0.2 57.6

Source: Inovestor

The 10 stocks that met our criteria are shown in the accompanying table, ranked by EPI.

Clorox Co. has the highest EPI of our screen, at 4.5. The cleaning products company saw share price gains – and extraordinary profitability – in the early stages of the pandemic, but the stock has fallen about 20 per cent since the end of July and trades at around the same price as a year ago. Similarly to other well-established U.S. companies such as Johnson & Johnson, Procter & Gamble Co. and Colgate-Palmolive Co., Clorox offers a strong consumer brand that has yielded consistent results in the past that are hard to ignore.

Progressive Corp., one of the biggest auto insurance companies in the U.S., has the second-highest EPI, at 4.4, and the second-highest relative EPI, at 1.2. This latter metric reflects a high return on capital of 38.8 per cent and a reasonable valuation based on its low P/E multiple of 10.2. The five-year maximum drawdown of only 22.3 per cent – the lowest on our list – suggests a resilient company. Moreover, Progressive has the highest three-month EVA change, at 98.2 per cent, and the highest five-year return on capital – 25.3 per cent.

AutoZone Inc., an auto parts retailer and distributor, ranks third on our list, with an EPI of 3.7, and solid profitability with a five-year mean return on capital of 25.1. Automobiles could very well be the next discretionary spending of choice for consumers, for three reasons: First, consumer savings are still well above prepandemic level, suggesting there is room for big purchases. Secondly, some discretionary car maintenance may have been delayed because of teleworking. Finally, the main alternatives for large discretionary spending related to the economy’s reopening, such as air travel, still seem less appealing in the near term.

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

For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.

Anthony Ménard is an investment analyst at Inovestor Asset Management.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Number Cruncher Extra – Clorox, Progressive & Autozone

In our last Number Cruncher we discussed how Clorox (CLX)Progressive (PGR) Autozone (AZO) are companies with incredible adjusted profitabily adjusted for risk and valuation. Now, we will look at these with our software Stockpointer.

Let’s start with CLX

The company has a SP score of 78 which is explained by the performance (86.2) and risk (25.1) score. Last year momentum is easily observable in all key metrics such as sales, EPS and performance spread. The company managed to increase its earnings per share by almost 20% per year in the last 5-year period.

We see in this chart that the market potentially overreacted to the company’s short-term profitabily boost and that the share price fell since July. At the current level, the NOPAT continues to grow rapidly and the share price approach a more reasonable entry point.

 

Progressive has a SP score of 76 explained by its performance score (72.5) and risk score (14.6). The company offers as much as 3 factors exposure: quality, value and growth. PGR grew at a rapid rate of 16.3% per year in the last 5-year which helped to increase its earnings per share by 53.2% per year. This performance is possible due to the substantial increase in the performance spread.

 

We see that our system has been fairly close to the actual share price in the past. Currently, due to the short-term boost from the pandemic, the intrinsic value exploded, but the share price didn’t follow. Our system indicated a potential increase around January 2020 since the Intrinsic value was fairly higher than the share price. The stock currently trades around that price. We believe the stock could see a potential increase from this point even if we don’t consider the intrinsic value to be representative of the potential upside.

 

Autozone has a SP score of 77 explained by its performance score (76.3) and its risk score (19.3). The stock has a similar profile than Clorox, slower Sales growth (5-6%), but still maintain EPS growth at more than 15%. This stock is the only one of the three to have the “low risk” factor exposure. We’ll directly pass to the next graph to better visualize that.

 

The NOPAT increased each year in the past five years. In 2018, the performance spread decreased significantly, but it could be because of the Trump tax plan. We would need to look further on this. Otherwise, the large performance spread gives a huge margin of safety that it will add value to shareholders over time.

 

If you have any questions about the article, feel free to contact Anthony :
Amenard@Inovestor.com

If you would like to sign up for a free trial and learn how Inovestor can benefit you, contact Olivier:
Olamothe@Inovestor.com

Canadian ETFs: March’s Launches and Terminations

The Canadian ETF Industry ended the first quarter of 2021 with assets under management of $278 billion. The number of new ETF listings keeps on increasing with 23 new listings added in March. 

RBC iShares expanded its Sustainable ETFs suite with three ESG Leaders ETFs. These ETFs currently seek to track MSCI indices that are designed to provide efficient exposure to companies demonstrating more sustainable business practices relative to their industry peers, while providing sector balance and market coverage. The ETFs can be used as sustainable equity building blocks for the core of a portfolio. 

Desjardins also launched an ESG ETF. The Desjardins RI Emerging Markets – Low CO2 Index ETF (“DRME-T”) complements the range of ETFs designed to significantly reduce carbon intensity relative to traditional equity indices. Under normal market conditions, the Fund will primarily invest in large and mid-cap companies from the Scientific Beta Emerging Markets Universe while seeking to deliver a significant reduction in the weighted average carbon intensity of the Fund’s portfolio and ensuring that all Constituent Issuers meet Pre-Determined ESG Standards. 

Emerge Canada Inc. introduced Canada’s first space exploration ETF, sub-advised by ARK Investment Management LLC. The Emerge ARK Space Exploration ETF is an actively-managed exchange-traded fund that invests in global equity securities of companies that are or, are expected to be, focused on leading, enabling, or benefitting from technologically enabled products and/or services that occur beyond the surface of the Earth. Its top holdings, as of March 31st, are Trimble Inc. (“TRMB-Q”)Kratos Defence and Security (“KTOS-Q”) and L3harris Technologies Inc. (“LHX-N”). 

CI First Asset launched the cheapest bitcoin ETF, in terms of management fee. The CI Galaxy Bitcoin ETF is the World’s third bitcoin ETF. Interest in the cryptocurrency space is acceleratingThe first bitcoin ETF has already hit a billion dollars in assets under management in less than two months of tradingHorizons ETFs even came out with an inverse bitcoin ETF on April 15th for investors who want a short exposure to bitcoin.

Horizons ETFs, Harvest ETFs and Accelerate Funds have reorganized their product suite and terminated the following ETFs in March: 

BlackRock Canada lowered the management fees on its core Canadian Fixed Income ETFs, effective April 1st.

How to add ESG factors to your portfolio? Negative/ Exclusionary screening

There’s a variety of methods to incorporate ESG factors into your portfolio. In this blog post series, we go over each of them, consider their benefits and drawbacks, and see how they can be implemented using Inovestor for Advisors.

Today, we look at negative, also called exclusionary, screenings. Negative screening entails the exclusion of companies, sectors, or countries based on specific activities that go against investors’ ethics or values. 

In its early days, ESG exclusionary screens were mostly implemented to target religious investorsInvestors would screen out companies involved in products that went against their faith. For example, tobacco, alcohol and gambling are among the sectors prohibited in Islamic Finance. Nowadays, negative ESG screens are used by a broadeaudiences, filtering out companies involved in a variety of values-based factors, like controversial weapons or animal testing. 

It can also be applied to specific countriescompanies and individuals. Many countries, including Canada, impose sanctions on other countries, organizations, or individuals that are responsible for gross violations of internationally-recognized human rights, such as extrajudicial killings or nuclear programs. These sanctions prevent trade, financial transactions or other economic activity with the sanctioned countries. Portfolio managers can proactively exclude countries and companies they believe are acting in unethical ways and are expected to be sanctioned. 

Negative ESG screening is the easiest and most widely-used way to implement ESG investing. By simply excluding companies involved in activities investors condemn, they are presented with a broad investible universe cleansed from companies directly involved in unacceptable activities. And, in good news, negative ESG screening does not wipe out the majority of the investible universe. As such, this is a good introductory method to ESG investing. Unlike the other methods, idoes not involve extensive research to identify what each company is doing to be more sustainable and mitigate their ESG risks. 

The main criticism of exclusionary screens is that investors “wash their hands rather than attempt to solve the problems. It is a passive way of dealing with ESG issues. Investors may not supporting unethical companies financially, but they are not encouraging them to take more ethical approaches, either. Additionally, within ESG filters, companies not involved in immoral products are all on the same level, without actually rewarding more sustainable ones.  

Implementation 

As mentioned, exclusionary screening is the easiest method of incorporating ESG to your portfolio. Here are the steps to implement negative screening: 

  1. Define products, sectors or countries to exclude

It is important to know which products, sectors or countries your clients don’t want in their portfolio. Adding the definition of each negative product, sector or country in the Investment Policy Statement (IPS) as part of the Know Your Client (KYC) procedures helps portfolio managers or investment advisors during portfolio construction or rebalancing. 

2. Filter out all companies knowingly involved in these products  

Once you have identified and defined which products, sectors or countries to exclude, you can screen out all companies that are directly involved in negative products. We offer a screener with ESG data, including controversial product involvement of companies. It removes the manual and time-consuming task of identifying these companies. 

3. Apply additional screens and models to the ethical investible universe 

After removing companies involved in negative products, additional financial filters can be applied or you can apply a model to your “ethical” investible universe to create your portfolio.
 

Example 

Inovestor for Advisors’ screener has a new feature for subscribers who have the ESG add-on. It allows users to add ESG screens on top of other StockPointer’s filters as an overlay. We used this newly launched ESG overlay to implement a negative screen.

 We applied the following filters to companies listed on NYSE and NASDAQ: 

  • ESG exclusionary criteria: Companies not involved in “sin products” including tobacco, adult entertainment, gambling, abortion, contraceptives, human embryonic stem cell and fetal tissue. 
  • Market capitalization of $10 billion and above, 
  • A positive Net Profit, 
  • Revenue of $100 million and above, 
  • Return on Capital of 10% and higher, 
  • Economic Performance Index (EPI) of 1 and above, 
  • EPI 12-month change of 1 and above and 
  • Current SP Score of 50 and higher, 

Our final screen consists of 21 large-capitalization companies with high economic performance and purified from “sin” products.

Make sure to contact your account executive to add Sustainalytics’ ESG data if you’re not already subscribed. For a full list of this screen, click here: ESG negative screen.

Its ease of implementation and its usefulness to align investors’ values with their investments make exclusionary screening the most commonly used technique to include ESG factors in the portfolio.

Portfolio Manager’s April Comment For Q1 2021

The performance of equity markets continued its upward trend following the beginning of the vaccination campaign and the anticipation of the complete reopening of the economy.

In Q1, The S&P/TSX Total Return Index rose by 8.1%, the S&P 500 expanded by 6.2% while the MSCI ACWI ex. USA increased by 3.8%.

In Q1, NQICA returned 9.4% leading to a 1-year return of 48.5% versus the S&P/TSX composite which returned 44.2% on an annualized basis.

In Canada, the best Q1 sectors were Health Care up 38.1%, Energy up 28.2% and Financials up 12.7%. The worst sectors were Materials down 7.3%, Info-Tech up 1.0%, and Utilities up 2.4%.

In Q1, the best performers in NQICA were TFI International (TFII), Richelieu Hardware (RCH) and Equitable Group (EQB) up 44.2%, 25.4% and 25.3% respectively.  On the other hand, the worst performers were Kirkland Lake Gold (KL), Alimentation Couche-Tard (ATD.B) and Parkland Corp. (PKI) down 18.9%, 6.6% and 5.8% respectively.