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What are we looking for?

In the second quarter, fiscal and monetary interventions were massive and to some extent, stronger than the shock from the COVID-19. As a result of these interventions, U.S. consumers’ disposable income is 6% higher than it was in January, leaving them with more money than before the crisis.

The economy appears to be recovering quickly with U.S. retail sales growing at 1.1% year-over-year favoring cyclical stocks. We will look at U.S. large caps operating in the consumer discretionary sector. These are serious candidates where consumers could spend their extra cash.

The screen (click here to access the screen through Stockpointer)

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

• Market capitalization higher than 15 billion;
• StockPointer (SP) Performance Score of more than 75 – The score mainly considers risk-adjusted return on capital and free cash flow per share. The score varies between zero and 100;
• Return on capital (5Y mean) higher than 12% – We look for a firm with a considerable return on capital. Consumer discretionary stocks have profited from the last economic boom so we can set a high return on capital;
• Positive 3 month change in sales – We want a business whose sales have not been hit too hard by the COVID-19;
• Positive 1Y dividend growth – We look for a company that didn’t stop to increase its dividend.

  For informational purposes, we have also included recent, stock price, dividend yield, one-year price return, net operating profit (NOP) change over 24 months, return on capital and earnings per share growth (5Y-mean);

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).

What we found

Home improvement retailer Home Depot has an impressive performance score of 90. The 5Y return on capital is also incredible at 30%. In the long run, we expect the company will manage to increase its sales around the GDP growth level while adding small amount of capital. The increase in free cash flow will allow to increase the dividend. The various restrictions related to the pandemic may have pushed consumer to renovate their house during their spare time. The company reports their Q2 on August 18^th before market opening.

Auto parts & equipments retailer O’reilly Automotive has a robust return on capital of 26.7%. Its short-term sales grew by 4.9% despite the pandemic during Q2 showing strong execution by management while facing important demand by consumers. Individuals may have used their cars more for vacations as other options were limited. The company generated an impressive annual EPS growth of almost 20% in the last 5-year period. The company doesn’t pay a dividend, but it returned $1.1B to shareholders through buybacks.

Farm supply and home improvement retailer Tractor Supply Co. has a trailing twelve month return on capital of 23.1% which compares positively to its 5Y mean of 18.2%. It increased its sales by 9.7% in the last 3 months and realized a NOP growth of 43.4% over 24 months showing great momentum both in the short and medium-term. The dividend growth is lower than other firms figuring on the list, but the company chose to strengthen its balance sheet by adding $1.1B in cash and cash equivalents compared to the previous Q2. An understandable decision considering the circumstances.

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

What are we looking for?
Canadian consumer staple stocks with vigorous long-term growth in earnings per share and robust return on capital.Since the beginning of the year, the difference in returns between consumer staples and the broader Canadian market has been striking. In the first six months of the year, the sector has kept its head above water at 0.6 per cent while the broader market stood at minus 9.1 per cent.

The second quarter rebound by the S&P/TSX Composite Index was less evident among staples stocks, but they are still comfortably ahead of the broader market. Work-from-home policies and general consumer cautiousness to avoid crowded areas continue to drive grocery spending and place consumer staples in a profitable environment.

The screen
Here is the screener we used and that you can play with

We screened companies focusing on the following criteria:

• Market capitalization higher than $250-million;
• Five-year average EPS growth higher than 8 per cent – we want a company that has been able to grow its earnings per share at a rapid pace;
• Most recently reported return on capital higher than 5 per cent. We look for a business with a decent ROC, and will rank the companies by this metric. We focus on the short-term return owing to the abnormal environment created by the pandemic;
• Positive price-to-earnings ratio – We want to eliminate unprofitable companies.

For informational purposes, we have also included: recent stock price; dividend yield; one-year price return; change in net operating profit after taxes (NOPAT) over the most recent three months; sales growth over the past 12 months; and five-year average sales growth.

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).

What we found

Convenient store giant Alimentation Couche-Tard tops our list with an ROC of 13.6 per cent. It shows a five-year EPS growth rate of 24.2 per cent and in the last year alone has increased its EPS by 29 per cent (not shown). Sales declined over the past 12 months compared with the previous year because of lower fuel volumes sold, but margins profited from the sharp decline in price of oil. The environment is certainly challenging, but the company showed resilience in its last quarterly report. Couche-Tard has an impressive track record and the P/E ratio seems quite reasonable considering its EPS growth and high return on capital. Economies of scale allow for greater margins while revenue diversification favours the stability of its returns.

Juice producer Lassonde Industries Inc. has the highest three-month NOPAT growth on our list. The company certainly has a substantial tailwind with its focus on retail products, but Lassonde also reported strong earnings growth and return on capital in the past. Twelve-month sales growth stands at 6.5 per cent, stronger than its 3.8 per cent annual sales growth over the past five years. Historically, its growth has been mostly done by acquisition owing to low growth in its industry, a strategy that seems to have paid off effectively.

Food and drug retailer Metro Inc. has realized an annual sales growth of 8.3 per cent over the past five years and 6.6 per cent in the most recent 12-month period. Its ability to increase the amount of invested capital combined with a strong return on capital while experiencing low sales volatility is the perfect recipe to a resilient business. The company has been fortunate in the crisis and could continue to benefit from increased grocery spending in the next few quarters.

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