What are we looking for?
Consumer discretionary companies whose trailing return on capital is below historical levels, suggesting that there is room to grow their profitability.
The screen (add this screener here)
The consumer discretionary sector is cyclical, and a trend reversal is anticipated. Companies that have profited heavily from the pandemic environment, pushing their return on capital to unsustainable levels, can expect this key profitability metric to revert to historical levels in the next few quarters.
That said, not all consumer discretionary companies will be equally affected by the trend. A solid contrarian strategy is to buy companies where the return on capital is historically low – and sell when it is high.
With that in mind, we screened North American stocks focusing on the following criteria:
- Market capitalization higher than $1-billion in their respective currency;
- Five-year average annual return on capital higher than 10 per cent – we look for a company with proven long-term profitability;
- Trailing return on capital lower than the five-year return on capital (and which, according to our strategy, can reasonably be expected to revert to its historical level);
- Positive sales growth in the past three months – we look for a company with a positive industry trend (and this is how our list is ranked);
- Three-month growth in net operating profit after tax (NOPAT) higher than 3 per cent.
For informational purposes, we have also included price-to-earnings, dividend yield and one-year price return. Please note that some ratios may be shown as of 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.
