What are we looking for?
The U.S. yield curve, specifically the two- to 20-year segment, is steepening. A steepening yield curve often signals an early expansion phase of the business cycle that leads to improving growth expectations or easier financial conditions ahead.
The market may be pricing in a steeper yield curve due to the U.S. government’s push for lower interest rates and the Federal Reserve’s increasingly dovish stance in response to a weakening labour market. Historically, cyclical stocks have done relatively well in steepening-curve regimes, while defensive names have lagged. Therefore, we are looking for stocks that provide us with an opportunity for sectoral tilt.
The screen
We screened U.S. stock universe, excluding utilities, health care, consumer staples and real estate (as classified under the Global Industry Classification Standard), in the top 25th percentile and focused on the following criteria:
- industry-relative quarterly cash flow momentum greater than 10 percentage points above the industry average – we want to capture companies whose cash flows are accelerating faster than peers;
- earnings before interest and taxes (EBIT) margin above 20 per cent, ensuring operational efficiency;
- trailing price-to-earnings ratio (P/E) below 30 – we want to have reasonably valued companies;
- three-year average earnings standard deviation (3YEPSD) measures the variability of quarter-over-quarter earnings-per-share increases, to ensure earnings stability;
- five-year average return on invested capital (ROIC) greater than 10 per cent. This is our profitability criteria.
For informational purposes, we also include market capitalization, one-year price return and dividend yield.
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What we found
| TICKER | NAME | MKT VALUE ($US BIL.) | IR QCFM (%) | 3Y EPS STD.DEV (%) | 5Y ROIC (%) | EBIT MGN (%) | P/E | 1Y PRICE RTN (%) | DIV. YLD. (%) |
| MMM-N | 3M Company | 89.0 | 130.9 | 4.9 | 19.2 | 24.5 | 21.2 | 25.6 | 1.7 |
| HON-Q | Honeywell Intl Inc | 121.5 | 22.5 | 1.5 | 14.3 | 22.5 | 18.1 | -15.4 | 2.5 |
| PTC-Q | PTC Inc. | 20.7 | 21.1 | 11.3 | 15.6 | 47.5 | 21.7 | -13.6 | – |
| HAS-Q | Hasbro Inc | 11.4 | 14.9 | 13.7 | 10.9 | 21.3 | 18.1 | 20.9 | 3.5 |
| TTD-Q | Trade Desk Inc | 17.6 | 14.7 | 4.6 | 44.2 | 37.2 | 22.5 | -70.6 | – |
| CARG-Q | CarGurus Inc. | 2.9 | 13.8 | 11.1 | 41.3 | 29.4 | 16.7 | -6.6 | – |
| CHKP-Q | Check Point Software | 20.7 | 13.5 | 4.1 | 29 | 41.7 | 17.2 | 2.7 | – |
| PAYC-N | Paycom Software Inc | 9.1 | 12.8 | 4.4 | 32.1 | 34.7 | 18.1 | -28.5 | 0.9 |
| LNG-N | Cheniere Energy Inc. | 44.3 | 11.1 | 21.4 | 11.7 | 26.9 | 18.8 | -9 | 1.1 |
| CTRA-N | Coterra Energy Inc | 20.9 | 10.6 | 23.1 | 11.1 | 31.0 | 12.6 | 6.7 | 3.2 |
| GFI-N | Gold Fields Limited | 37.8 | 10.4 | 28.3 | 16.6 | 48.1 | 19.8 | 198.7 | 1.8 |
| ATGE-N | Adtalem Global Educ | 3.4 | 10.3 | 6.8 | 10.5 | 20.8 | 13.2 | 3.1 | – |
3M Co.(MMM-N) is a diversified industrial conglomerate that provides safety, industrial, transportation, electronics and consumer solutions across global markets. In our screen, it has an industry-relative quarterly cash flow momentum of 130.9 per cent, showcasing outstanding leadership in cash flow generation compared to its peers. The company also has ROIC of 19.2 per cent, indicating impressive profitability. However, investors should be cautious of the recent U.S. army ear plugs product liability tort lawsuit settlement charge of around US$6-billion.
Honeywell International Inc. (HON-N) is in the aerospace technologies, industrial automation, building automation, and energy and sustainable solutions businesses. Within our screen, Honeywell has the lowest 3YEPSD of 1.5 per cent, showcasing stability in company’s earnings over three years, and it has a dividend yield of 2.5 per cent. Honeywell is great for investors who are seeking income-generating cyclical investments with dependable earnings. Investors should take note that the company is undergoing structural changes: Its advanced materials segment was separated last year, and its aerospace segment is scheduled to be spun off in 2026 into a separate company.
PTC Inc. (PTC-Q) is a global software company that provides product life-cycle management, computer-aided design and industrial Internet of Things solutions to manufacturing and engineering customers. In our screen, PTC stands out with the second-highest EBIT margin of 47.5 per cent, third-highest industry-relative quarterly cash-flow momentum of 21.1 per cent and a solid five-year average ROIC of 15.6 per cent. PTC offers operational efficiency and has proven track record of profitability. The company provides an opportunity for investors who are seeking exposure in the technology sector.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
