Category

Number Cruncher

ESG-friendly Companies that Combine Quality, Growth and Value

WHAT ARE WE LOOKING FOR?

ESG-friendly, quality companies demonstrating growth at acceptable valuations.

Essentially, our search combines the three most used fundamental factors: quality, growth and value. The objective is to find a solid company that grows and has an reasonable valuation. We consider environmental, social and governance criteria as part of our qualitative analysis.

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

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization higher than $5-billion;
  • StockPointer (SP) score of 70 or higher – the SP score is a complex composite that focuses on quality and value. The score varies between zero and 100. A score of more than 60 is considered solid.
  • PEG (price/earnings-to-growth) ratio below two – The ratio considers valuation and growth. It is the price-to-earnings ratio divided by the five-year mean of earnings per share growth.
  • ESG score lower than 22.1 – the current score of the S&P/TSX 60. The score uses Sustainalytics’s methodology to calculate unmanaged ESG risks. The score is the sum of the ESG risks. The score mostly varies between zero and 50, where zero stands for the most ESG-friendly company.

For informational purposes, we have also included the recent stock price, P/E ratio, five-year EPS growth mean, ESG scores, three-year dividend growth rate, one-year price return and dividend yield. Please note that some ratios may be shown as of the previous quarter’s end.

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

ESG-friendly companies that combine quality, growth and value

TICKER NAME PRICE MKT. CAP ($MIL) SP SCORE PEG P/E 5Y EPS GRTH. (%) ESG SCORE ENV. SCORE SOC. SCORE GOV. SCORE 3Y DIV. GRTH. (%) 1Y PRICE RTN. (%) DIV. YIELD (%)
MFC-T Manulife Financial Corporati 27.15 52710 72 0.41 9.3 22.6 19.4 1.7 7.5 10.1 11.0 109.3 4.1
QBR-B-T Quebecor Inc. Class B 35.48 8800 74 0.53 16.3 30.7 19.4 2.2 10.1 7.1 96.8 30.7 3.1
H-T Hydro One Limited 28.99 17320 72 0.60 9.8 16.3 16.3 3.4 7.8 5 4.8 38.1 3.5
TD-T Toronto-dominion Bank 82.42 149880 71 1.41 12.5 8.9 19.1 1.2 10.4 7.5 9.6 67.3 3.8
L-T Loblaw Companies Limited 66.59 22130 72 1.43 21.8 15.2 18.6 5 8.4 5.1 6.2 11.5 2.0
DOO-T Brp, Inc. 102.56 9020 73 1.59 42.4 26.7 14.4 0.1 7.6 6.7 -14.5 405.2 0.4
CP-T Canadian Pacific Railway Lim 474.27 63220 70 1.62 26.4 16.3 17 5.9 8.4 2.7 17.6 79.4 0.8
DOL-T Dollarama Inc. 51.25 15900 73 1.94 28.2 14.5 16.2 3.6 7.6 5.1 7.1 44.6 0.4

Source: Inovestor

Life insurer Manulife Financial Corp. has the most reasonable price relative to its growth, with a PEG ratio of 0.41, a result of its low P/E ratio of 9.3 and high EPS growth (five-year mean) of 22.6 per cent. Since the beginning of the year, the Government of Canada 10-year bond yield has increased by approximately one percentage point. Signs of a strong economic recovery tend to push bond yields higher. A rising yield environment tends to favour insurance companies because higher interest rates are inclined to generate higher fees.

Telecommunications company Quebecor Inc. achieved the highest five-year EPS growth of our list, at 30.7 per cent, while selling at a below-average P/E of 16.3. Note also its annual dividend growth of 96.8 per cent in the previous three-year period. The company announced on Feb. 25 that it will lift its quarterly dividend for 2021 by 38 per cent, continuing its streak of dividend hikes. Quebecor could benefit from reduced competition if Rogers Communications Inc.’s deal to purchase Shaw Communications Inc. goes through.

Hydro One Ltd., the electricity transmission and distribution utility serving Ontario, has an ESG score that is 26.2 per cent less than that of the S&P/TSX 60. The company has a virtual monopoly on the transmission of electricity, an essential good, which provides a high degree of stability to its operations. The company’s net income is inflated because of a favourable tax event in the past year, but it should not change its position in the table.

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

Anthony Ménard is an investment analyst at Inovestor Asset Management.

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

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.

 

Small caps poised for growth in a post-pandemic world

What are we looking for?

Small caps with solid fundamentals.

We believe small capitalization stocks, generally seen as more risky than large caps, will also be more likely than large caps to take advantage of renewed economic activity as the pandemic recedes in the months ahead.

The screen (access and save it on the Inovestor for Advisors platform)

We screened North American stocks focusing on the following criteria:

  • Market capitalization between $250-million and $1-billion;
  • StockPointer (SP) performance score of 75 or higher. The score mainly considers risk-adjusted return on capital, earnings per share growth and free cash flow per share. The score varies between zero and 100;
  • Sales growth higher than 4 per cent over 24 months – we are looking for a company that can grow at a reasonable rate;
  • One-year return lower than 50 per cent – we are trying to eliminate companies with too much short-term price? momentum as they could be subject to mean reversion, that is, eventually revert to their long-term average levels.

For informational purposes, we have also included the recent stock price, price-to-earning ratio, one-year earnings per share growth and dividend yield. 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, advisors 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 NAME PRICE MKT. CAP ($MIL) SP PERF. SCORE 24M SALES GRTH. (%) 1Y PRICE RTN. (%) P/E 1Y EPS GRTH. (%) DIV. YIELD (%)
RAY-A-T Stingray Group, Inc. 7.09 520 82.1 48.9 17.8 20.9 -3.6 4.2
SIS-T Savaria Corporation 16.74 855 79.9 45.8 30.8 30.4 18.9 2.9
ITIC-Q Investors Title Company 163.77 310 79.4 51.3 -4.8 7.9 25.0 1.1
HIFS-Q Hingham Institution For Savi 245.00 516 78.0 23.3 27.3 11.9 30.2 0.8
FMNB-Q Farmers National Banc Corp. 13.83 390 77.9 27.5 -13.0 9.4 14.8 3.2
CSW-A-T Corby Spirit And Wine Limite 16.80 477 77.4 4.8 -0.8 15.3 16.6 5.0
RBNC-Q Reliant Bancorp Inc 21.77 355 77.0 91.0 0.1 10.9 39.2 2.2
AGM-N Federal Agricultural Mortgag 83.11 872 75.9 4.6 16.4 10.1 5.2 3.9
CCBG-Q Capital City Bank Group, Inc 24.50 411 75.8 42.1 -13.7 12.7 2.4 2.5
BFC-Q Bank First Corp 69.10 533 75.3 42.1 9.4 15.0 30.6 1.2
TVK-T Terravest Industries, Inc. 17.55 324 75.0 4.2 6.4 10.3 32.7 2.3

*Market cap and recent stock price figures are in native currency.

Music service provider Stingray Group Inc., based in Montreal, has the highest SP performance score of our list. Sales increased vigorously in the last two years partly because of a series of acquisitions. The stock price rose moderately in the last year as the broadcasting and commercial music segment held out, but the radio segment (mostly ads), which counts for 50 per cent of Stingray’s total revenues, fell 40 per cent on a nine-month basis. The company managed to protect its earnings per share despite this bleak time. As radio commercials and social activities return more to pre-pandemic levels, we expect investors to positively re-evaluate the company.

Laval, QC.-based, Savaria Corp., an accessibility and patient handling company, has increased its sales by 45.8 per cent in the past two years, thanks largely to the acquisition of Garaventa Lift, an elevator company. With the pandemic spotlight on long-term care and retirement residences, older people may be more inclined to consider adapting their house to their reality rather than move, which would benefit Savaria. The company announced on Feb. 4 it had acquired Swedish-listed Handicare Group AB, another patient handling company, to reinforce their already well-positioned business in this industry.


Investors Title Co.,
a title insurance provider headquartered in Chapel Hill, N.C., trades at a modest price earnings ratio of 7.9. The company has profited from the booming U.S. residential real estate market over the past two years, achieving 51.3 per cent higher sales over that period, and 25 per cent higher EPS in the past year. If teleworking persists, the strong residential market could very well remain. Despite impressive results, the market appears to be particularly cautious: The company’s stock still trades about 20 per cent below its all-time high of US$204, reached in March, 2018.

Anthony Ménard is an investment analyst at Inovestor Asset Management.

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

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.

 

Eight profitable North American stocks with tempting valuations

What are we looking for?

Companies with strong profitability and below-average valuations.

Companies with high multiples tend to have high expectations. At some point these expectations may exceed the company’s capabilities and result in a poor investment outcome. We believe that analyzing companies with solid profitability and reasonable valuations is an effective way to limit this risk and uncover attractive securities.

The screen (you can find it here on the Inovestor’s platform)

We screened North American stocks focusing on the following criteria:

· Market capitalization higher than $1-billion;

· Five-year mean return on capital higher than 10 per cent. We want a company with solid long-term profitability;

· Free-cash-flow-to-capital higher than 12.5 per cent. We want a company that generates a high amount of free cash flow as a percentage of capital. It shows the company has plenty of capital to invest or to redistribute to shareholders;

· A price-to-book ratio lower than two. We want a company that sells at a reasonable price based on shareholders’ equity;

· A positive price-to-earnings ratio lower than 20. We don’t want to pay too much for the company’s profits.

For informational purposes, we have also included recent stock price, trailing 12-month return on capital, dividend yield and one-year return. Please note that some ratios may be reported 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

Home furnishings retailer Leon’s Furniture Ltd. generates a whopping 33.4-per-cent free cash flow as a percentage of capital. The stock is also inexpensive based on the price-to-earnings ratio of 11.1. With the lockdowns, individuals have necessarily cut back spending on social activities. Interest rates, meanwhile, have dropped substantially. Combined, these elements support the purchase of durable goods. This could explain the company’s above-trend return on capital.

Juice producer Lassonde Industries Inc. is a resilient company as evidenced by its five-year mean return on capital, which, at 14.1 per cent, is about equal to its most recent return on capital. The company’s earnings reports over the past year have been exceptional, owing largely to its market segment: retail consumers. It could be an interesting defensive choice in case of lower-than-expected economic growth or further COVID-19 restrictions.

Lumber, finishing products and pulp producer Canfor Corp. saw its stock price rise by 84.5 per cent in the past year as lumber prices soared by more than 75 per cent. The company is highly cyclical. An investor who believes that the economy will expand vigorously and who has a high risk tolerance may consider the stock to enhance portfolio returns.

Although the screener is for North American companies, it’s notable that five out of eight companies are Canadian, even with this country’s more limited universe of stocks. Valuation criteria (P/E and P/B) would seem to limit the number of U.S. companies, suggesting value investors may want to concentrate their search efforts in the North American market to Canadian-listed names.

 

TICKER NAME PRICE MKT. CAP ($MIL) FCF/CAPITAL (%) RTN. ON CAPITAL – 5Y MEAN (%) P/E P/B RTN. ON CAPITAL (%) 1Y PRICE RTN. (%) DIV. YIELD (%)
LNF-T Leon’s Furniture 21.00 1660 33.4 10.2 11.1 1.7 11.2 23.8 3.0
BIG-N Big Lots** 50.82 1885 20.7 10.2 3.2 1.5 14.1 82.4 2.4
LAS-A-T Lassonde Industries 172.00 1193 18.1 14.1 11.6 1.6 14.2 15.2 1.5
UHS-N Universal Health Services 129.10 10971 17.9 10.2 12.6 1.8 10.4 -12.3 0.6
CFP-T Canfor Corp 23.67 2964 15.1 11.0 17.0 1.6 9.8 84.5 0.0
DISCK-Q Discovery Comm Inc 32.89 16478 14.4 20.6 13.5 1.6 19.0 14.8 0.0
WTE-T Westshore Terminals Investment Corp 17.34 1125 13.3 17.8 8.6 1.5 16.0 -3.5 3.7
IFP-T Interfor Corp 24.04 1617 13.0 11.7 18.1 1.6 14.3 58.6 0.0

*Market cap and stock price figures are in native currency
**Please note that some figures for Big Lots are inflated by a capital gain caused by a sale-leaseback transaction of distribution centres.

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

Anthony Menard 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.

Nine Companies Creating Shareholder Wealth

What are we looking for?

Companies showing momentum in their fundamentals as well as low volatility.

We mix two well-known metrics in the financial world to create our screener. We want a positive change in the economic value-added (EVA) figure, which tends to coincide with a positive stock return. We also use beta to find low-volatility stocks that should produce, on average, a better risk-adjusted return.

The Screen (available here on the Inovestor’s platform)
We screened Canadian companies, focusing on the following criteria:

  • A market capitalization higher than $1-billion;
  • A positive three-month change in the EVA metric between 5 per cent and 75 per cent – 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;
  • A 24-month change in the EVA metric between 15 per cent and 200 per cent – we want a positive change in EVA in the medium-term;
  • A one-year return on capital higher than 7 per cent – we want a company with decent profitability;
  • Sales growth over 24 months higher than 4 per cent. Sales growth provides the opportunity to a company to expand and generate higher EVA in the long-term;
  • A beta lower than one – 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. This is our low-volatility factor.

The stocks are ranked by five-year mean return on capital. For informational purposes, we have included recent stock price, dividend yield and one-year return. Please note that some ratios may be reported at 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).

TICKER NAME PRICE MKT. CAP ($MIL) EVA CH. 24M  (%) EVA CH. 3M (%) 24M SALES CH. (%) BETA RTN. ON CAPITAL (%) RTN. ON CAPITAL – 5Y MEAN 1Y PRICE RTN. (%) DIV. YIELD (%)
ENGH-T Enghouse Systems Limited 66.56 3680 85.4 13.2 44.2 0.89 23.6 23.4 60.7 0.8
RCH-T Richelieu Hardware Ltd 37.27 2105 51.4 69.0 7.8 0.76 18.1 16.9 40.0 0.7
TIH-T Toromont Industries Ltd. 90.21 7425 20.5 10.0 4.5 0.81 13.4 16.1 31.5 1.4
CP-T Canadian Pacific Railway Lim 421.8 56732 39.8 7.8 10.6 0.86 16.3 14.7 34.6 0.9
JWEL-T Jamieson Wellness, Inc. 35.53 1416 160.7 18.4 22.9 0.30 16.1 11.4 37.3 1.4
IFC-T Intact Financial Corporation 143.7 20552 49.3 34.4 16.1 0.81 11.4 10.3 5.6 2.3
L-T Loblaw Companies Limited 64.30 22860 34.2 74.1 9.1 0.03 7.5 8.4 -10.5 2.1
NPI-T Northland Power Inc. 46.31 9389 77.7 16.9 27.8 0.87 9.1 6.2 67.6 2.6
FNV-T Franco-nevada Corporation 169.45 32336 64.1 17.0 51.6 0.36 7.6 4.8 32.6 0.7

What we found

Software and services company Enghouse Systems Ltd. posted impressive financial results over the 24-month period in terms of sales and EVA change. The company has the highest return on capital over the past year as well as over the past five-year period. The share price rose 50 per cent in the first half of 2020, but has since given back some of this gain. It has declined by about 15 per cent since its record high of $80 on Sept. 2. With this pullback, the current price could offer an opportunistic entry point.

Hardware distribution company Richelieu Hardware Ltd. posted a massive uptick in its three-month EVA change. Moreover its short-term ROC is higher than its five-year average, another signal of momentum.

Toromont Industries Ltd., a construction equipment and power systems specialist, might seem less dynamic than the first two ideas at first glance, if comparing its one-year return on capital to its five-year corresponding figure. We think this is perfectly normal for a cyclical company at this time of the economic cycle. The market anticipates the changing cycle as the stock is up more than 25 per cent year-to-date regardless of lower revenues and earnings per share (not shown). The company has the third-highest long-term ROC and we anticipate the lower one-year ROC figure will converge rapidly to its long-term profitability.

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

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.