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Number Cruncher

Eighteen low volatility S&P 500 stocks capable of withstanding market shocks

The unresolved and further complication of the Sino-U.S. trade dispute hit the markets once again last week, which I believe will cause higher volatility in the markets in the short run. On Friday, U.S. President Donald Trump confirmed that, for now, no business will be made with Chinese telecom giant, Huawei, and that he is not ready to finalize a trade deal with China. This follows China’s decision to stop purchasing American agricultural products. Therefore, for the Globe and Mail this week, we screened the U.S. market to identify companies with low volatility and sustainable operations that can withstand further potential market turmoil.

This strategy screens the S&P 500 using the following criteria:

  • A market capitalization of US$10-billion or more;
  • A beta of one or less. A stock with a beta less than one is considered less volatile than the market;
  • A five-year average return on capital (ROC) greater than or equal to 10 per cent, reported as of last quarter’s end, and a positive change in the 12-month return on capital figure;
  • A minimum free-cash-flow-to-capital ratio of 5 per cent. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to do such things as stimulate growth, distribute or increase dividends, or reduce debt;
  • A 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 faster and greater pace than the costs 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;
  • A cost of capital less than 10 per cent, reported as of last quarter’s end.

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Seeking wealth creators among U.S. consumer discretionary stocks

In this week’s filter created for The Globe and Mail, we screened for wealth creators in the US consumer discretionary sector. We are looking for improving performance and comparing it to the premium or discount the market has attributed to those companies. We screened the S&P 500 Consumer Discretionary stock universe by focusing on the following criteria:

  • Market capitalization above US$10-billion;
  • A current economic performance index (EPI) equal to or greater than one – this ratio is the return on capital to cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent;
  • A positive 12-month EPI change – this measures the growth in return on capital versus cost of capital over the past 12 months;
  • A future-growth-value-to-market-value ratio (FGV/MV) between 50 per cent and minus 50 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount as that would increase the risk. 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.

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These 17 Canadian-listed small-cap stocks show solid fundamentals

In this week’s filter created for The Globe and Mail, we screened for Canadian-listed small-cap stocks showing solid fundamentals.

Today we highlight Canadian small-cap growth companies that have sound fundamentals.

We screened the Canadian stock universe by focusing on the following criteria:

  • Market capitalization between $200-million and $1-billion;
  • A current economic performance index (EPI) greater than one – this ratio is the return on capital to cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent;
  • Positive 12-month sales growth;
  • A PEG, or price-earnings to growth, ratio between zero and two. This ratio compares the current price-to-earnings ratio with the average five-year earnings per share growth. For a stock to be fairly valued, the PEG ratio is one. For the stock to be undervalued, the PEG ratio would be lower than one, showing that the stock price does not fully reflect the earnings growth capability of the company.

Our Findings:

Magellan Aerospace Corp., an aerospace systems and components manufacturer based in Mississauga, is the largest company on our list by market cap. The PEG ratio is 0.8, which suggests that the earnings growth was stronger than what is reflected by the stock price – in other words, an attractive valuation. On the other hand, the company’s operations are efficient, as indicated by the EPI, which shows return on capital at 1.5 times the cost of capital.

TerraVest Industries Inc., an Alberta-based manufacturer whose products include fuel-containment vessels and wellhead processing equipment for the oil and gas industry, is one of the smallest companies on our list by market cap. It has a PEG ratio is 0.6, putting the stock at an attractive price point. In addition, the sales grew strongly, at 34.6 per cent, over the past 12 months.

This article is written by Noor Hussain, Analyst at Inovestor Inc. 

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

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Thirteen defensive U.S. health care and consumer staples stocks

In this week’s filter created for The Globe and Mail, we screened for Thirteen defensive U.S. health care and consumer staples stocks.

Looking back at May, it was the worst month so far in 2019 for the markets. The U.S.-China trade war spiralled deeper early in the month, with U.S. President Donald Trump raising tariffs on US$200-billion worth of Chinese products and China retaliating by setting tariffs on US$60-billion of American goods. Last week, the markets tumbled as the geopolitical mess worsened due to escalating trade tensions. In addition, last Thursday Mr. Trump threatened Mexico with a new wave of tariffs, which will begin on June 10. During this period of extended uncertainty, non-cyclical sectors hold up better due to their defensive characteristics. Today, we will screen U.S. health care and consumer staples stocks to identify some companies with solid operations and revenues that may be able to withstand this trade-war storm. We screened the U.S. stock universe by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • A 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 is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • A positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is the return on capital to cost of capital;
  • A future-growth-value-to-market-value ratio (FGV/MV) of between 40 per cent and negative 70 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount as that would increase the risk. 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.
  • Free-cash-flow-to-capital ratio. This metric 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.

Eleven U.S. energy stocks poised to withstand oil-price volatility

In this week’s filter created for The Globe and Mail, we screened for U.S energy companies that can withstand magnified volatility.

Market speculation around production cuts by the Organization of Petroleum Exporting Countries and the impact of U.S. sanctions against Iran and Venezuela have been among the factors driving recent oil-price volatility. Today, we will identify U.S. energy companies whose healthy operations and strong fundamentals make them solid bets to withstand the heightened unpredictability. We screen the S&P 500 energy sector for quality companies by using the following criteria:

  • Market capitalization greater than US$5-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 (NOPAT) minus capital expenses;
  • A positive change in the 12-month NOPAT – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • Future growth value/market value (FGV/MV) between minus 50 per cent and 50 per cent, to exclude companies with exaggerated discounts or premiums. FGV/MV 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.
  • Free-cash-flow-to-capital ratio. This metric 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.
  • Economic performance index (EPI), which is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. Anything above one is favourable; the higher the figure the better.

Twelve established growth stocks poised for further gains

In this week’s filter created for The Globe and Mail, we screened for established growth stocks poised for further gains.

In the late stage of the business cycle, such as many argue we are in now, it is important for growth investors to improve their downside protection without sacrificing potential upside returns.

Today we look for growth stocks supported by favourable fundamentals that should allow them to capture further gains in a rising market.

We screened Inovestor’s U.S. universe of stocks by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • 12-month change in the economic value-added (EVA) metric greater than 10 per cent – 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 is the economic profit generated by the company and is calculated as the net operating profit after tax (NOPAT) minus capital expenses;
  • One-year return of at least 10 per cent;
  • Average annual earnings-per-share (EPS) growth over five years of at least 15 per cent;
  • Annual sales change one year ago or two years ago of at least 10 per cent;
  • Current economic performance index (EPI) greater than one. This is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. A ratio above one is key for sustainable investment opportunities;
  • Free-cash-flow-to-capital ratio. 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 looking for a positive ratio.
  • Future-growth-value-to-market-value ratio (FGV/MV). 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.

Fifteen U.S. stocks to play defensively amid the latest market volatility

In this week’s filter created for The Globe and Mail, we screened for U.S stocks that can act defensively amid the recent volatility.

Last Friday, the U.S. yield curve inverted, causing some panic in the stock market. On Monday, the curve stabilized but still remained inverted, prompting caution from investors. An inversion, resulting from uncertain economic growth, is often seen as a leading indicator of recession. In order to protect themselves, investors may choose to re-allocate some of their assets to non-cyclical sectors, which act defensively during market volatility. Today we look into two of them: utilities and telecommunications. We screened the U.S. universe by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • 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 is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • Positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is the return on capital to cost of capital;
  • Future-growth-value-to-market-value ratio (FGV/MV) is between 40 per cent and minus 70 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount because that would increase the risk. 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.

Read more in this article written by Noor Hussain, Analyst & Account Executive at Inovestor Inc.

U.S. stocks with unsustainable dividends

In this week’s filter created for The Globe and Mail, we screened for U.S. stocks with unsustainable dividends

Depending on an individual’s investment strategy, a large part of portfolio returns may significantly depend on dividends. Hence, it is valuable to be mindful of companies that may cut their dividends in the future due to unsustainable dividend yields. Those are companies we may want to avoid. We will do that by screening for companies that are struggling to cover their costs and whose profits have been declining over the past couple of years, but who are still raising their dividend yields. We screened the U.S. and American depositary receipt (ADR) companies for unsustainable dividends using the following criteria:

  • Market capitalization greater than $1-billion;
  • Negative 12-month and 24-month change in the net operating profit after tax (NOPAT) metric – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • Positive one-year dividend growth and a dividend yield greater than 3 per cent;
  • Economic Performance Index (EPI) less than one. This is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. A ratio above one is key for sustainable investment opportunities;
  • Free-cash-flow-to-capital ratio. 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, but for this screener we will focus on a ratio below 5 per cent.

Read more in this article written by Noor Hussain, Analyst & Account Executive at Inovestor Inc.

Strategy focuses on quality, profitability in the oil patch

In this week’s filter created for The Globe and Mail, we screened for  Canadian energy stocks with improving fundamentals.

With oil prices on the rise in 2019, and energy stocks making up a notable proportion of the Canadian market, a large part of the gains on the S&P/TSX Composite Index so far are thanks to the energy sector. Today we look for improving company fundamentals to see whether the recent price bump for many of these stocks is justified by their operations. We screened the S&P/TSX energy sector for quality companies by using the following criteria:

  •  Market capitalization greater than $1-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 (NOPAT) minus capital expenses;
  •  A positive change in the 12-month NOPAT – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  •  Future growth value/market value (FGV/MV) between minus 50 per cent and 50 per cent, to exclude companies with exaggerated discounts or premiums. FGV/MV 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.
  •  Free-cash-flow-to-capital ratio. 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.

Read more in this article written by Noor Hussain, Analyst & Account Executive at Inovestor Inc.

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;

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