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Noor Hussain

Number Cruncher Extra – Fifteen U.S. stocks to play defensively amid the latest market volatility

One of the companies mentioned in this week’s Globe and Mail article where we focused on 2 non-cyclical US sectors, namely, Utilities and Telecommunications, will be covered in more details below.

Verizon’s Communications (VZ)

As we can see from the Scorecard, Verizon possesses a Positive Fundamental Outlook and an attractive SPscore of 63%, where the Performance score is in the green shaded area, whereas the Risk score is very close to the yellow shaded area- representing a medium risk for the company.

The 6% decline in score marked below the SPscore, is either due to a fall in performance or a rise in risk since last quarter.

We know that the Risk score is affected by 2 main metrics which are the Price over Intrinsic Value and the Future Growth Value.

On the scorecard, we can see from the FGV graph that while the stock is still trading at a discount, the discount has decreased over the recent quarters. Therefore, increasing the risk slightly.

As for the Performance, we look at the EVA graph, EVA seems to have suffered tremendously just by looking at the graph below. That is actually not the case if we take a deeper look at the numbers.

Due to the tax cuts that took place in 2017, the EVA was artificially inflated. Verizon and many companies benefitted when their profits were boosted due to the cut. That effect, however, was reversed back to normal in December 2018 when the real taxes were reported and thus creating the sharp fall in EVA seen on the previous graph.

This correction shows a negative change in NOPAT from 2017 to 2018 by more than $10 billion, ultimately leading to a deeper plunge in EVA. In this case, we should compare current EVA to that in Dec 2016 to get a more accurate view of whether this company’s performance improved or deteriorated. (It improved in the case of Verizon)

Portfolio Manager Commentary – February 2019

The S&P/TSX Total Return Index increased by 3.1% in February, adding to the strong January returns (8.1%) and leading to a YTD return of 12.2%. This gives the Canadian market a very strong start so far in 2019 which has actually slightly outperformed the MSCI Global (11.2%) and the S&P 500 (11.8%). Most sectors of the Canadian market were positive contributors in February, with Information Technology being the strongest one at an 8.4% increase.

The Canadian central bank & the FED comments have remained highly constructive for the equity markets. Although some analysts were expecting a more hawkish tone for the future, central banks have not indicated such act. Furthermore, the overall earnings and guided earnings have been positive over this period.

In addition, commodity prices, including energy and metals, have been stable which is crucial for the Canadian market. Finally, Canadian banks’ results were in-line to slightly below expectations, except for BMO, that came higher than expected.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 2.1% in February, leading to a YTD positive return of 10.7%, slightly underperforming the market.  Looking at contribution factors to the NQICA returns, the best performing stock up 14.6%, was Constellation Software (CSU), that outperformed earnings expectations. On the contrary, the worst performer was CCL industries (CCL.B) which was down 3% in February as a result of weaker than expected results.

Number Cruncher Extra – Strategy focuses on quality, profitability in the oil patch

As mentioned, in the Globe and mail article – Canadian Natural Resources Ltd (CNQ) seems to reflect improving and promising performance. However, it is important to note that the EVA is still negative, meaning CNQ is still not adding value to its shareholders and this is due to the company’s high cost for raising capital. Although that difference is decreasing (due to a greater increase in profits than an increase in capital costs), it is not yet eliminated, hence why CNQ is still risky (given by the 51% risk score seen on the Scorecard) and signals an overall neutral outlook.

Fundamental outlook is neutral even though performance score is high because the risk score is also high
Risk score is 51%

On the other hand, for a more sustainable investment pick – lets look at Parex Resources (PXT). Apart from the reasons mentioned on the Globe and Mail article, PXT has an attractive scorecard. First, the positive outlook signal! This signal is due to the high score of 65% made up from a high-performance score and a low risk score. The stock rose by 7.24% as seen in the screener however it is still undervalued (this is given by the FGV and the P/IV graphs)

Intrinsic Value crosses the price line indicating an undervalued stock
The FGV is negative indicating a discounted stock valuation.
For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.
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Number Cruncher Extra – These 15 U.S. stocks are creating shareholder wealth – and here’s how we found them

In this week’s filter created for The Globe and Mail, we screened for wealth creating US stocks by using the following criteria:

We screened the S&P 500 by focusing on the following criteria:

  • Market capitalization of more than US$10-billion;
  • 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 greater pace than the cost 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;
  • Economic performance index (EPI) of more than one and a positive EPI 12-month change. This is a key criterion as it represents the ratio of return on capital to cost of capital. An EPI of more than one indicates that the company is generating wealth for shareholders – for every dollar invested into the company, more than one dollar is generated in returns;
  • Free-cash-flow-to-capital ratio greater than 5 per cent. This ratio gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent.
  • Future-growth-value-to-market-value (FGV/MV) between 40 per cent and minus 70 per cent. This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
For subscribers to StockPointer, you can  select the link below and adjust the screener to your liking

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