What are we looking for?
Profitable businesses trading at attractive valuations.
When it comes to long-term investing, two of the most powerful drivers of performance are return on invested capital (ROIC) and valuation. Return on capital measures how efficiently a company turns its investments into profits and is an essential indicator of business quality and durability. Meanwhile, valuation metrics like enterprise value over EBITDA (EV/EBITDA) help investors gauge how much they are paying for those profits.
Combining robust profitability with low valuation can lead to outsized returns, making this duo a cornerstone of disciplined, fundamentals-based investing.
The screen
We screened the U.S. universe using the following criteria:
- CPMS Score in the top 10th percentile (We rank the U.S. universe based on ROIC and EV/EBITDA);
- Market capitalization greater than US$5-billion;
- ROIC greater than 15 per cent;
- EV/EBIDTA lower than 12;
- Positive three-year annualized cash flow growth;
- Six-month price change greater than minus-10 per cent;
For informational purposes, we also added price-to-earnings ratio and dividend yield.
More about Inovestor
For 25 years as a pioneering Canadian fintech, we’ve consistently pushed the boundaries to empower investment advisors with advanced, easy-to-use investment strategies. Discover more about our journey and offerings on our website.
What we found
Undervalued firms with solid fundamentals
| TICKER | NAME | PRICE (US$) | CPMS SCORE (%) | MKT CAP (Bil. US$) | EV/EDA | ROIC (%) | 3Y ANN. CF. (%) | 6M PRICE CHG. (%) | P/E | DIV. YLD. (%) |
| LNTH-Q | Lantheus Holdings Inc | 81.74 | 82 | 5.7 | 7.7 | 63.4 | 45.7 | -8.4 | 12.3 | – |
| DBX-Q | Dropbox | 29.46 | 80 | 6.2 | 10.5 | 83.5 | 13.2 | 6.5 | 11.2 | – |
| MO-N | Altria Group Inc | 59.43 | 79 | 100.1 | 9.4 | 39.8 | 3.7 | 2.9 | 11.4 | 6.9 |
| MOH-N | Molina Healthcare Inc. | 322.20 | 76 | 17.5 | 10.8 | 37.8 | 16.3 | 8.2 | 14.0 | – |
| MLI-N | Mueller Industries Inc | 74.99 | 76 | 8.3 | 8.9 | 34.8 | 2.1 | -7.2 | 13.7 | 1.3 |
| IDCC-Q | InterDigital Inc. | 211.96 | 74 | 5.5 | 11.0 | 35.2 | 37.0 | 8.2 | 13.6 | 1.1 |
| ULTA-Q | Ulta Beauty Inc. | 392.17 | 71 | 17.7 | 10.8 | 30.9 | 8.7 | 1.4 | 15.4 | – |
| PPC-Q | Pilgrims Pride Corp. | 47.07 | 70 | 11.2 | 5.7 | 22.5 | 29.7 | -8.8 | 7.9 | – |
| CROX-Q | CROCS Inc. | 109.77 | 69 | 6.2 | 7.3 | 23.3 | 8.3 | 3.9 | 8.4 | – |
| HRB-N | H & R Block Inc. | 57.66 | 68 | 7.7 | 11.4 | 28.6 | 16.4 | -2.7 | 13.2 | 2.6 |
| NVS-N | Novartis AG | 108.70 | 68 | 214.7 | 9.1 | 25.0 | 11.5 | 2.8 | 13.1 | 3.5 |
| RYAAY-Q | Ryanair Holdings plc | 49.80 | 64 | 26.5 | 8.9 | 19.1 | 50.7 | 13.1 | 15.3 | 1.8 |
| FTI-N | TechnipFMC plc | 29.86 | 63 | 12.5 | 9.5 | 19.6 | 76.2 | -4.8 | 17.7 | 0.7 |
Lantheus Holdings Inc. (LNTH-Q) develops imaging agents to improve disease detection and treatment. The company stands out with a stellar ROIC of 63.4 per cent, the second-highest of our list, reflecting highly efficient use of capital. Despite a recent six-month price dip of 8.4 per cent, Lantheus maintains solid fundamentals with a robust three-year annualized cash flow growth of 45.7 per cent. Trading at an EV/EBITDA ratio of 7.6 and 12.2 times earnings, the valuation appears reasonable given its robust financials.
Dropbox Inc. (DBX-Q) is a cloud-based file storage and collaboration platform. With an impressive ROIC of 83.5 per cent, the highest of our list, Dropbox delivers exceptional returns on capital, and its respectable 13.2 per cent three-year cash flow growth shows steady performance. The stock has gained 6.5 per cent in the last six months, indicating positive market sentiment. Despite operating in the valuation-rich tech space, Dropbox trades at a conservative P/E of 11.3, suggesting potential value in the eyes of long-term investors.
Altria Group Inc. (MO-N) , a leading force in the tobacco industry, is known for its strong cash flow and steady shareholder returns. With an impressive ROIC of 39.8 per cent, the company demonstrates outstanding capital efficiency within a mature sector. While Altria offers the highest dividend yield on our list at 6.9 per cent, this comes at the expense of growth, with a modest three-year annualized cash flow increase of just 3.7 per cent, the lowest among our list.
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.
