What are we looking for?
Robust U.S. companies with a history of profitability and modest debt.
Last week, Federal Reserve chairman Jerome Powell indicated that the central bank was not in a hurry to cut interest rates after big job gains in March and higher-than-expected inflation.
As those anticipated rate cuts are deferred yet again, the importance of identifying companies resilient to high rates becomes ever more pronounced. In addition, the prolonged elevation of interest rates raises concerns about the potential market downturn they might create.
Quality companies with low debt can adeptly navigate such market conditions.
The screen
We screened for U.S. companies with a market capitalization greater than US$10-billion with
- a long-term debt to net operating profit after taxes (NOPAT) ratio lower than 1 – note that this excludes short-term debt;
- an economic performance index (EPI) greater than 2. The EPI is return on capital divided by the cost of capital – a measure of profitability adjusted for risk. An EPI greater than 1 implies positive economic value creation;
- a future growth value (FGV) on enterprise value (EV) ratio lower than 80 per cent. This metric represents the speculative value attributed to a company. We assume the company will produce its NOPAT forever without growth and we discount it using the company’s cost of capital. This computation yields an intrinsic value, which we deduct from the EV, resulting in the future growth value that we divide by the EV. A value lower than 80 has the objective of removing companies with extreme valuation;
- positive one-year NOPAT growth;
- five-year annualized earnings-per-share (EPS) growth greater than 10 per cent.
For informational purposes, we have also included dividend yield and one-year price return.
More about Inovestor
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What we found
| TICKER | NAME | RECENT PRICE (US$) | MKT. VALUE (US$ BIL.) | DEBT/NOPAT | EPI | FGV/EV (%) | 1Y NOPAT GRTH. (%) | 5Y ANN. EPS GRTH. (%) | DIV. YLD. (%) | 1Y PRICE RTN. (%) |
| ANET-N | ARISTA NETWORKS, INC. | 297.60 | 92.9 | 0.0 | 2.8 | 78.4 | 44.9 | 43.8 | – | 82.7 |
| MNST-Q | MONSTER BEVERAGE CORPORATION | 55.90 | 58.2 | 0.0 | 2.5 | 64.7 | 31.0 | 11.9 | – | 5.9 |
| VRTX-Q | VERTEX PHARMACEUTICALS INCORPORATED | 406.67 | 104.8 | 0.2 | 3.0 | 41.5 | 10.8 | 11.3 | – | 26.3 |
| GOOG-Q | ALPHABET INC. CLASS C | 153.94 | 1918.1 | 0.3 | 2.3 | 59.9 | 15.9 | 21.5 | – | 46.7 |
| DECK-N | DECKERS OUTDOOR CORPORATION | 879.89 | 22.6 | 0.3 | 3.2 | 64.9 | 41.8 | 25.8 | – | 95.9 |
| EME-N | EMCOR GROUP, INC. | 365.02 | 17.2 | 0.4 | 2.3 | 53.1 | 47.1 | 22.3 | 0.3 | 136.7 |
| NBIX-Q | NEUROCRINE BIOSCIENCES, INC. | 138.92 | 13.7 | 0.5 | 2.5 | 42.3 | 30.2 | 61.3 | – | 35.9 |
| REGN-Q | REGENERON PHARMACEUTICALS, INC. | 942.70 | 103.1 | 0.5 | 2.1 | 37.4 | 1.5 | 10.3 | – | 14.2 |
| FIX-N | COMFORT SYSTEMS USA, INC. | 323.40 | 11.5 | 0.6 | 2.1 | 66.8 | 25.5 | 24.4 | 0.3 | 145.7 |
| KNSL-N | KINSALE CAPITAL GROUP, INC. | 448.14 | 10.4 | 0.6 | 4.7 | 66.3 | 93.4 | 52.9 | 0.1 | 49.2 |
| LULU-Q | LULULEMON ATHLETICA INC | 356.87 | 45.0 | 0.6 | 3.2 | 66.4 | 26.9 | 27.5 | – | -2.2 |
| FTNT-Q | FORTINET, INC. | 70.91 | 54.0 | 0.7 | 3.0 | 77.0 | 21.9 | 30.3 | – | 8.8 |
| META-Q | META PLATFORMS INC. CLASS A | 527.34 | 1350.5 | 0.7 | 2.3 | 66.4 | 27.9 | 14.7 | 0.4 | 149.4 |
| MSFT-Q | MICROSOFT CORPORATION | 425.52 | 3162.5 | 0.8 | 2.4 | 71.8 | 22.8 | 20.5 | 0.7 | 49.7 |
| AAPL-Q | APPLE INC. | 169.58 | 2621.7 | 0.8 | 4.5 | 62.3 | 5.3 | 16.0 | 0.6 | 3.6 |
Arista Networks Inc. delivers software-driven cloud networking solutions for large data-center storage and computing environments. Over the past five years, the company has achieved a stellar track record of EPS growth, averaging 43.8 per cent a year. With a solid economic performance index of 2.8, Arista Networks exemplifies resilience in navigating market fluctuations. Notably, its debt-to-NOPAT ratio remains close to zero, indicating prudent debt management.
Monster Beverage Corp. Renowned for its vibrant energy drinks and diverse beverage offerings, Monster has experienced robust growth, reflecting its strong market presence and consumer appeal. Monster’s current EPI of 2.5, combined with a long-term debt-to-NOPAT ratio close to zero, highlights its stability and resilience amid market fluctuations. With a commendable NOPAT growth of 31.1 per cent over the past year, the company showcases its ability to deliver consistent returns to shareholders while adapting to changing market dynamics.
Alphabet Inc., the parent company of Google, epitomizes market dominance in the tech sector. The company made the screen along with three other Magnificent Seven companies – Meta, Microsoft and Apple. The company distances itself from the other Magnificent Seven stocks with its five-year annualized EPS growth of 21.5 per cent, a debt-to-NOPAT ratio of 0.3, and an FGV/EV of 59.9 per cent.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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