Category

Number Cruncher

Seven Growth Stocks That Are Reasonably Priced

What are we looking for?

Growth stocks outperformed value by a huge margin over the past 10 years. And while higher valuations are often seen as problematic for growth companies, let’s put that into perspective. Today, we look for U.S. and Canadian large caps with a growth-at-a-reasonable-price (GARP) tilt.

The screen

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

· Market capitalization higher than $25-billion;
· Economic performance index (EPI) higher than 2.5 – this is the ratio of return on capital to cost of capital. We look for businesses with a sizable risk-adjusted return on capital;
· StockPointer (SP) Performance Score of more than 75. The score, which can range between zero and 100, mainly considers risk-adjusted return on capital and free cash flow per share;
· PEG ratio below three – this is our growth-at-a-reasonable-price (GARP) factor, which considers valuation and growth. It uses the price-to-earnings ratio divided by the five-year earnings growth mean (while mean is similar to average, this method puts more weight on extreme values)
· 12-month sales growth higher than 4 per cent – we are looking for a company showing sales momentum in the past year;
· 24-month growth in net operating profit (NOP) of more than 10 per cent. We want a company showing strong improvement of its operations in the past two-year period;
· Most recent return on capital lower than 50 per cent – we exclude companies with an unsustainable ROC (a really high ROC is often temporary, owing to a short-term boost from unusual items);

For informational purposes, we have also included recent price-to-earnings ratio, five-year earnings growth mean, dividend yield, one-year price return and recent stock price. Please note that some ratios may be 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. 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

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) NOP CH. 24M (%) SP PERF. SCORE RTN ON CAPITAL (%) EPI SALES CH. 12M (%) PEG Ratio P/E Ratio 5Y EPS Growth Mean (%) 1Y PRICE RTN. (%) DIV. YIELD (%)
HD-N Home Depot, Inc. 266.71 287100 18.8 91.0 38.6 3.8 8.5 1.5 24.4 16.2 12.4 2.3
INTU-Q Intuit Inc. 314.68 82390 50.8 90.5 27.2 2.6 13.2 1.1 45.5 40.0 22.7 0.8
CLX-N Clorox Company 207.25 26120 14.1 86.0 23.3 3.8 8.2 2.6 28.2 10.9 41.0 2.1
FAST-Q Fastenal Company 43.23 24820 14.4 86.0 26.9 2.7 5.3 2.8 29.6 10.5 16.4 2.3
CSU-T Constellation Software Inc. 1398.59 29640 37.4 82.5 30.3 3.8 15.3 2.8 65.4 23.3 7.0 0.4
ORLY-Q O’reilly Automotive, Inc. 436.6 31990 24.5 77.7 29.2 3.4 9.4 1.0 19.5 19.9 -0.1 0.0
TROW-Q T. Rowe Price Group 126.66 28680 23.7 77.2 28.1 2.6 6.5 1.2 14.2 12.2 8.3 2.8
CPRT-Q Copart, Inc. 110.36 26040 51.8 77.0 27.5 2.7 8.0 1.3 37.6 28.0 33.1 0.0

The top three on our list using this approach, ranked by SP performance score, are Home Depot Inc.Intuit Inc. and Clorox Co.

Home improvement retailer Home Depot is an excellent example of how long-term growth can generate massive returns for investors. It has the highest return on capital and performance score of our list. The PEG ratio is in the middle of the pack and this company is also of premium quality based on its long-term historical growth. This more than justifies the higher PEG ratio than some others on our list.

Software developer Intuit Inc. has a P/E of 45.5, but the valuation is one of the cheapest if we consider the PEG ratio. This case illustrates that a P/E ratio can mean nothing if it is not compared with historical growth statistics. Intuit premium valuation is supported by its superior SP Performance Score, its 12-month sales growth and its 24-month NOP growth.

Clorox Co., a maker of disinfectant products and other household items that have been in high demand during the pandemic, has had a massive tailwind in the past three quarters. (Its fiscal first-quarter earnings, reported Monday, topped Wall Street’s forecasts, with sales up 27.2 per cent compared with the year-ago period.) In the short term, we can expect health measures to contribute to sales even if a vaccine makes it to the market. Its high EPI can be attributed to its strong retail brands and market dominance. More than 80 per cent of the company’s sales are generated from brands that hold the No. 1 or No. 2 market share positions in their respective categories. While the return on capital is lower than other candidates, that is a small price to pay for its incredible stability.

Investors are advised to do further research before investing in any of the companies shown here.

For more details about these growth stocks, please subscribe the Inovestor for Advisors platform for free here.

Christian Godin is a portfolio manager at Inovestor Asset Management.

Signs of Elevated Risk in Lofty Tech Stock Valuations

What are we looking for?
The tech rally shouldn’t be a surprise considering this year’s work-from-home environment. The health and safety measures put in place by government authorities around COVID-19 forced consumers to change their habits to include more tech products in their lifestyle. But do tech stocks justify their lofty valuations?

For perspective, we compare today’s results with a similar screen of tech stocks we did two years ago (tgam.ca/IT-Inovestor).

The screen
Here is a link for our screener

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

·Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA gives us a sense of how much value this stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the capital expense;

·Positive EVA and EVA growth on a per-share basis over 12 months;

·Economic performance index (EPI) – the ratio of return on capital to cost of capital – must be greater than one;

·Average five-year return on capital must be greater than 10 per cent and the 12-month change in return on capital must be positive (not shown);

·Future growth value/market value (FGV/MV) and the 12-month change in FGV. The FGV/MV 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;

·Beta – this gives us an idea of how closely the company mimics the market’s fluctuations. A beta of less than one would indicate the stock is less volatile than the market at large.

For informational purposes, we have also included recent stock price, dividend yield and one-year return (as of last month’s end). Please note that some ratios may be reported at end-of-previous quarter.

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) 12M EVA CHG. EVA/S Ch. 12M EVA per Share EPI Beta FGV Ch. 12M DIV. YIELD (%) 1YR PRICE RTN.(%) FGV ($M) ROC (Avg 5 Y) FGV / MV
ZM-Q Zoom Video Communications, I 482.23                        136,191 N/A N/A 0.81 3.8 0.5 78.7 0.0 526.4              133,352 12.4 97.9%
VEEV-N Veeva Systems Inc Class A 275.56                           41,798 6.7 0.2 0.82 1.6 0.9 38.3 0.0 80.6                38,458 15.1 92.0%
MSCI-N Msci Inc. Class A 348.16                           29,308 1.0 0.1 5.54 2.4 1.0 25.4 0.9 57.7                24,021 18.7 82.0%
ADBE-Q Adobe Inc. 478.99                        232,045 35.8 1.8 5.29 2.4 0.8 32.7 0.0 73.0              187,498 17.0 80.8%
TYL-N Tyler Technologies, Inc. 350.72                           14,302 14.4 0.4 2.59 1.5 0.7 36.6 0.0 34.8                11,158 14.8 78.0%
MSFT-Q Microsoft Corporation 206.19                     1,580,000 30.0 0.7 2.89 1.9 0.9 25.9 1.1 50.4          1,149,583 13.3 72.8%
CDNS-Q Cadence Design Systems, Inc. 105.32                           29,876 161.3 1.8 2.21 1.9 1.0 11.4 0.0 60.6                19,209 12.2 64.3%
JKHY-Q Jack Henry & Associates, Inc 161.56                           12,454 11.2 0.2 2.90 2.1 0.9 13.6 1.1 11.6                  7,933 21.5 63.7%
UI-N Ubiquiti Inc. 165.26                           10,998 72.9 1.7 5.26 5.2 0.9 4.9 1.0 39.8                  6,727 34.8 61.2%
LOGI-Q Logitech International S.a. 77.78                           13,558 194.5 1.6 2.16 2.8 0.5 13.5 1.1 90.8                  6,155 13.4 45.4%
GRMN-Q Garmin Ltd. 94.93                           18,398 79.1 0.8 2.52 1.8 0.9 6.3 2.6 12.2                  7,649 14.4 41.6%

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

The current market environment for tech stocks is more challenging than in late 2018: We see higher valuations and decreasing EVA per share growth compared with our previous screen. More companies show an extreme FGV/MV, signalling elevated risk, and the average EVA growth is 91 per cent, compared with 146 per cent two years ago.

Zoom Video Communications Inc. has been one of the big winners during this upheaval. The communications technology company certainly has a good EPI, while its three-month sales growth (not shown) is an incredible 190.4 per cent. That said, its EVA per share of 81 US cents for a stock trading in the US$480 range definitely doesn’t support the current valuation.

Computer software company Adobe Inc. is one of two names on this list that made our screen two years ago (the other was Jack Henry & Associates). Adobe’s valuation based on the FGV/MV is lower than in 2018 (80.8 vs. 84.5). The company also has the second-highest 12-month change in EVA per share on our list. This indicates a strong improvement of its profitability. In this case, the valuation can be justified by strong financial performance and doesn’t seem disconnected with its fundamentals based on historical data.

Investors are advised to do further research before investing in any of the companies shown here.

For more details about these tech stocks, please subscribe the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/

 

SEVEN U.S. CONSUMER DISCRETIONARY WITH SIZEABLE LONG-TERM RETURN ON CAPITAL

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).

TICKER NAME PRICE ($) MKT CAP ($MIL.) SP PERF. SCORE RTN ON CAPITAL 5Y-MEAN (%) SALES CH. 3M (%) 1Y DIV. GROWTH (%) NOP CH. 24M EPS GROWTH 5Y-MEAN RTN ON CAPITAL (%) DIV. YIELD (%) 1Y PRICE RTN. (%)
HD-N Home Depot, Inc. 271.64 292160 90.0 30.4 1.7 25.4 20.3 15.3 35.5 2.2 29.4
ORLY-Q O’reilly Automotive, Inc. 465.18 34470 77.7 26.7 4.9 0.0 24.5 19.9 29.2 0.0 21.9
AZO-N Autozone, Inc. 1182.22 27620 76.5 26.4 0.0 0.0 7.6 13.0 28.8 0.0 8.6
TSCO-Q Tractor Supply Company 148.1 17120 88.5 18.2 9.7 9.4 43.4 14.9 23.2 1.1 35.8
LOW-N Lowe’s Companies, Inc. 152.78 115350 88.0 16.2 2.7 14.6 23.1 16.2 20.4 1.4 52.1
COST-Q Costco Wholesale Corporation 340.91 150520 82.7 13.1 1.6 12.3 30.1 9.9 14.2 0.8 24.1
DG-N Dollar General Corporation 195.29 49160 84.1 13.0 6.6 10.9 22.6 16.5 14.0 0.7 42.1

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 18th 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.

Consumer Staples Stocks With Solid EPS Growth

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.

TICKER NAME PRICE ($) MKT CAP ($MIL.) EPS GROWTH AVG 5Y (%) RTN ON CAPITAL (%) NOPAT CH. 3M (%) SALES CH. 12M (%) 5Y AVG Sales Growth (%) P/E DIV. YIELD (%) 1Y PRICE RTN. (%)
ATD-B-T Alimentation Couche-tard 45.75 50940 24.2 13.6 0.7 -7.1 13.5 16.2 0.6 10.6
LAS-A-T Lassonde Industries, Inc. 154.45 1070 12.6 12.3 2.1 6.5 3.8 13.2 1.7 -18.9
MRU-T Metro Inc. 56.64 14280 9.2 11.1 0.3 6.6 8.3 19.5 1.6 14.0
WN-T George Weston Limited 101.30 15650 52.2 9.5 1.0 4.6 2.1 12.1 2.1 0.1
PBH-T Premium Brands Holdings Corp 87.32 3280 32.0 8.0 0.5 18.3 25.6 36.8 2.7 -7.0
ADW-A-T Andrew Peller Limited Class 8.26 383 8.5 7.3 -1.6 0.1 3.4 15.0 2.5 -41.7
L-T Loblaw Companies Limited 67.43 24130 69.9 5.5 0.3 4.1 1.8 21.9 1.9 0.4

 

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.

Seeking Downside Protection Among Utilities, Telecom Sectors

What are we looking for?
Last week’s sharp market downturn reminded us of the not so distant, painful memories of the market correction of last February and March. As the saying goes, stocks take the staircase up and the elevator down. This is why investors can make use of defensive stocks to protect their portfolios and limit their downside. Utilities and telecommunications stocks can be great defensive holdings.

Today, we will look at Canadian and U.S. large caps in the telecom and utilities sectors. Dividends are a key component of these sectors, so we will focus on companies with a sustainable payouts.

The screen
We screened companies focusing on the following criteria:
· Market capitalization greater than $5-billion (Canadian);

· Four-year annual dividend growth higher than 6 per cent. A company whose dividend is
increasing should see its total return follow the same trend;

· Growth in net operating profit after taxes (NOPAT) over 24 months. The company needs to increase its operating income to have a sustainable growth in its dividend;

· StockPointer (SP) Performance Score of more than 65 – The score mainly takes into account risk-adjusted return on capital and free cash flow per share. A great score means the company has a good profitability to increase its dividend. The score varies between zero and 100.

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

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). For more details about these defensive stocks, please subscribe the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/

Company Ticker Sector Mkt. Cap. ($ Mil.)* 4Y Ann. Div. Growth (%) 24M NOPAT Chg. (%) SP Perform. Score Div. Payout (%) Div. Yld. (%) 1Y Price Rtn. (%) Recent Price ($)*
BWX Technologies Inc. BWXT-N Utilities 5,600 22.6 2.0 87.5 24.8 1.3 17.5 58.79
Quebecor Inc. QBR-B-T Telecom 7,450 66.5 0.5 70.0 16.8 2.7 -8.6 29.50
Telus Corp. T-T Telecom 29,780 7.4 0.9 69.7 64.0 5.0 -4.5 23.30
Portland Gen’l Electric POR-N Utilities 3,990 6.4 2.7 68.8 61.3 3.5 -19.3 44.63
Fortis Inc. FTS-T Utilities 23,860 6.7 1.6 68.1 38.0 3.7 -1.0 51.39
Canadian Utilities Ltd. CU-T Utilities 8,490 8.9 1.8 66.7 59.6 5.6 -18.5 31.02
American Water Works AWK-N Utilities 23,040 10.1 0.8 66.3 56.8 1.7 9.1 127.29
CMS Energy Corp. CMS-N Utilities 16,690 7.1 1.1 65.9 62.5 2.8 0.6 58.30
* Figures shown in native currency. Source: Inovestor

What we found
BWX Technologies Inc., a U.S. supplier of nuclear fuel and components, has the highest SP Performance Score of our filtered list. Its dividend grew at an average annual rate of 22.6 per cent over the past four years. Its revenue grew by more than 6 per cent annually over the past five years and return on capital went from 8.5 per cent to 19.1 per cent over that period. With a dividend payout of 24.8 per cent, we see room for future increases.

Media conglomerate Quebecor Inc. increased its dividend in the past four years by an average annual 66.5 per cent. The lack of investment opportunities may be the reason behind this decision, in which case increasing the dividend rather than doing bad investments could be viewed as a wise decision. The payout ratio is the lowest on our list at 16.8 per cent, leaving further room for additional increases without jeopardizing the business’s sustainability.

Telus Corp., one of the Big Three mobile phone operators in Canada, has the second-largest market capitalization of our screen (the largest market cap, belonging to American Water Works Co., is shown in U.S. dollars). Telus also shows stable and high returns on capital, which are reflected in its SP Performance Score of 69.7. The company seems a safe choice. Although its four-year annual dividend growth rate is considerably lower than either BWX or Quebecor, Telus’s strong market share and economies of scale should allow it to continue to increase its dividend in the future.

Investors are advised to do further research before investing in any of the companies shown in the accompanying table.
Here is the screen we used :

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.

 

Canadian small caps in good shape to get through the crisis

What are we looking for?

Small cap stocks have generally been hit harder than large caps in the current market turmoil. The S&P/TSX SmallCap Index is down 30.6 per cent year-to-date, while the S&P/TSX Composite has lost 15.8 per cent over the same period.

Companies with lower capitalizations are more likely than the large caps to have liquidity issues in dealing with the COVID-19 fallout. However, it is incorrect to conclude every small cap is in danger. Today, we look for Canadian small caps with a focus on companies that have a strong balance sheet, a healthy return on capital and an attractive track record. Please note all financial ratios are reported at the end of the previous quarter and do not reflect the impact of COVID-19.

The screen

We screened Canadian companies focusing on the following criteria:

  • Market capitalization between $250-million and $500-million;
  • Economic performance index (EPI) higher than one – the EPI is the return on capital divided by the cost of capital. The return on capital is a measure of profitability and the cost of capital a measure of risk. We want a company that generates a decent amount of money while we take into account operational risk;
  • Positive sales growth over 24 months – a great company should have been able to increase its revenue in the past two years;
  • Long-term debt lower than $100-million – we want a company with a low level of debt;
  • A StockPointer (SP) score higher than 50 – the SP score is a complex composite that focus on quality and value. This is our track record criterion. The score varies between zero and 100; a score above 50 is considered good;
  • Positive free-cash-flow-to-capital – we want a company that generates enough liquidity to make it through the crisis.

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.) ECON PERF INDEX Long-term debt ($MIL.) SALES CH. 24M (%) FCF / CAPITAL (%) SP SCORE DIV. YIELD (%) 1Y PRICE RTN. (%)
VMD-T Viemed Healthcare Inc 9.32 359 3.4 13.8 74.8 12.3 62 0.0 25.4
SEC-T Senvest Capital Inc. 110.99 292 1.8 4.7 136.0 6.6 53 0.0 -40.7
ISV-T Information Services Corp. 14.58 255 1.6 25.0 42.1 10.9 65 5.5 -13.7
TCS-T Tecsys Inc. 19.98 261 1.2 18.5 43.2 3.7 54 1.2 41.2
MAL-T Magellan Aerospace Corporation 6.41 373 1.1 70.8 4.9 5.9 57 6.6 -65.1
ABT-T Absolute Software Corporation 10.05 426 1.1 9.6 12.3 0.4 58 3.2 12.3

What we found

Home medical equipment supplier Viemed Healthcare Inc. has good overall scores and systematically generated return on capital above its cost of capital. The company, which provides post-acute respiratory care services, said recently it is working with health agencies in helping to transition patients with chronic respiratory failure out of hospital quicker in order to free up beds for COVID-19 patients.

Senvest Capital Inc. has interest in investment management and direct investing in public securities and private investments. Revenue is directly affected by the change in market value of its investments. Senvest has generally good scores but in the short term  it will take heavy losses we expect it to take heavy losses because of the market downturn. The SP score considers the company of moderate quality because of the volatility of the business model.

Information Services Corp., which provides registry and information management services for public data and records, has a decent EPI and is an alternative for investors looking for higher yielding stocks. In the past five years the company has produced a great free-cash-flow-to-capital, allowing for a dividend yield of 5.5 per cent.

Tecsys Inc. provides supply chain services for warehouse, distribution and transportation management. Its large exposure to the hospital sector could provide it with strong tail winds.

Components and systems manufacturer Magellan Aerospace Corp. has a strong track record, but its exposure to the aerospace industry leads us to temper our view on its outlook because of COVID-19.

Finally, data risk manager Absolute Software Inc. is well positioned to grow its sales in the next quarter as more employees work remotely.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these small caps, please subscribe the Inovestor for Advisors platform for free: inovestor.com/en-CA/store.

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

 

Cyclical Large-Cap Stocks for Investors to Keep on Their Radar

What are we looking for?

As expected, cyclical sectors have been hit harder than defensive ones in the past month. Switching now to defensive stocks, which are far less correlated than cyclicals to the overall economy, may limit losses in the shorter term, but also future gains during a rebound. On the expectation of an eventual slowdown in the number of COVID-19 cases, it may be prudent for investors to keep cyclical stocks on their radar.

Today, we will be looking at cyclical large caps in Canada with a focus on companies that have a good track record in the past five years. Please note that all financial ratios are reported at the end of the previous quarter and do not reflect the impact of low oil prices and COVID-19.

The screen

We screened Canadian companies from the consumer discretionary, energy, financials and materials sectors, focusing on the following criteria:

  • Market capitalization greater than $3.5-billion;
  • Five-year average return on capital higher than 8 per cent – we want to find profitable companies that have a good return on investment in the long term;
  • Sales growth higher than 6 per cent over 24 months – a great company should have been able to grow its revenue in the past 24 months;
  • Net operating profit growth higher than 20 per cent over 24 months – we want to see growth in the bottom line while excluding the impact of interest rates and taxes.

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 (%) RETURN ON CAPITAL 5-YEAR AVERAGE (%) NET OPERATING PROFIT Ch. 24M (%) 1Y PRICE RTN. (%) DIV. YIELD (%) SECTOR
KL-T Kirkland Lake Gold Ltd. 36.75 10540 88.7 19.5 266.3 -17.7 1.8 Materials
TIH-T Toromont Industries Ltd. 58.32 4780 56.5 17.5 63.9 -13.2 2.1 Industrial – Commercial Svcs and Supplies
IAG-T Ia Financial Corporation Inc. 37.05 3963 26.6 12.8 22.2 -26.7 5.2 Financials – Insurance
RBA-T Ritchie Bros. Auctioneers Inc. 40.91 4480 120.8 11.9 46.1 -9.5 2.6 Industrial – Commercial Svcs and Supplies
SLF-T Sun Life Financial Inc. 36.44 21391 22.1 11.0 21.2 -27.6 5.7 Financials – Insurance
MFC-T Manulife Financial Corporation 13.62 26540 37.0 10.6 173.1 -40.6 8.2 Financials – Insurance
WSP-T Wsp Global Inc. 64.08 6800 28.4 8.8 46.4 -11.7 2.3 Industrial – Capital Goods

What we found

Kirkland Lake Gold Ltd., Toromont Industries Ltd. and IA Financial Corp. Inc. are the companies with the best five-year average return on capital while showing strong operating profits and sales growth. We believe these stocks in particular are worth further investigation by investors.

Note that three of the seven stocks on our list are life insurance companies, which are negatively affected by lower interest rates, but they also have strong capital ratios that will help them weather the current environment.

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

For more information about these cyclical stocks, readers can subscribe to the Investor for Advisor platform for free: https://www.inovestor.com/en-CA/store/

Opportunities might arise during bear markets

WHAT ARE WE LOOKING FOR?

From February 20, to March 5, 2020, the S&P 500 was down more than -15%, officially landing in the market correction territory. As the COVID-19 continues to spread in new territories, global supply chains are being disrupted, and companies are readjusting their forecasts. Mainland China is the most impacted with 111,363 confirmed cases and a death rate of 3.7% (as of 09/03/2020). Although we are facing a lot of uncertainty in the global economy and the financial markets, this might be a good opportunity for investors to buy stocks at a discounted price.

Today we will be looking at US fundamentally-sound stocks that are trading at a discount, giving the recent market correction.

THE SCREENER

  • market cap: $1B – we are only looking for large cap companies
  • Current SP Score: A minimum score of 50. The SP Score is a scoring system model, based on a 12-factor algorithm, which focuses on quality and value. The weights for quality and value are 75% and 25%, respectively.
  • Price 20-day Change (%): Stocks that are down at least –15% in the past 20 days. A 15% drop is considered a market correction
  • Increase in NOPAT over 24 months: at least 5% increase in NOPAT over the last 24 months. We are looking for companies that can increase the profitably of the business
  • Positive EVA: We are looking for companies with positive EVA only. Economic Value Added (EVA) is a measure of true economic profit created by a company. The higher Economic Value Added, the more value a company generates for its shareholders.
  • Increase in Sales over the last 24 months: At least a 7% increase in sales over the last 2 years. We are looking for company that can scale and grow the business
  • Dividend yield: At least a yield of 3%. This is an indicator that the company can distribute their profits with the shareholders

 

 

WHAT WE FOUND

We found 10 companies that were potentially affected by the market correction but appear to have strong fundamentals.

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) CURRENT SP SCORE NOPAT ($) NOPAT CHG. 24M (%) EVA ($) SALES CHG. 24M (%) DIV. YIELD (%) 20D PRICE RETURN(%) 1YR PRICE RTN.(%)
CSCO Cisco Systems, Inc. 39.68 168282.88 57 12558.94 5.70 2178.16 7.19 3.05 -18.80 -22.87
VNO Vornado Realty Trust 52.35 9998.10 56 3717.36 12.19 2109.23 156.51 3.97 -20.95 -20.40
CMA Comerica Incorporated 44.81 6367.30 70 1207.15 6.88 196.67 15.81 3.74 -26.94 -39.57
SNV Synovus Financial Corp. 25.58 3764.29 71 607.47 9.44 241.97 67.08 3.06 -30.05 -26.86
SHLX Shell Midstream Partners Lp 15.1 3522.67 56 602.33 8.54 453.59 7.00 8.36 -24.31 -4.31
MCY Mercury General Corporation 44.31 2452.91 55 320.09 7.14 214.03 13.53 5.16 -17.49 -18.24
EVR Evercore Inc Class A 61.67 2415.98 73 360.46 6.86 221.71 17.08 3.00 -23.93 -27.67
PAGP Plains Gp Holdings Lp Class 12.2 2222.09 63 2304.97 6.24 803.80 26.32 7.28 -24.03 -40.62
GEF-B Greif Class B 37.07 2197.23 53 483.68 6.44 291.95 29.21 3.71 -24.47 -11.99
CADE Cadence Bancorporation Class 12.06 1538.83 56 217.18 7.29 4.67 99.04 3.86 -25.88 -29.36

 

Cisco Systems is one of the global players in the Network and Cloud industry. They have been increasing their revenue year-over-year as well as their operating margins. One of the strategies put in place to boost revenues is to offer new products targeted to small businesses This could be a game changer, as we see the rise of small businesses in North America. Although the company beat Q2 earning, the stock dropped due to fears of COVIS-19, as 40% of their sales is outside the US. Given its potential, the stock price has been trading at the same price level as February 2018 – this might be a good buying opportunity.

Vornado Realty Trust is a real estate investment trust formed in Maryland, with its primary office in New York City. The company invests in office buildings and street retail in Manhattan. They have been constantly distribution a stable dividend yield of around 3.9%. The company has been increasing the net profit margin, ROE and ROA over the last 3 years. They are the largest owner of LEED-certified property in the US, with more than 27 million square feet of LEED-certified properties. With a solid balance sheet and a strong market presence in the US, Vornado might be trading at a discount given a rent drop of -21% last 20 days

 

For more details about Vornado Realty Trust and Cisco Systems, performance, readers can subscribe to the Investor for Advisor platform for free: https://www.inovestor.com/en-CA/store/

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