What are we looking for?
U.S. equities with improving valuations and fundamentals.
We look for a negative three-month price-to-earnings (P/E) ratio and a positive three-month current operating value (COV) change to discover stocks with an attractive signal. A divergence in these metrics implies paying less now for more value than just three months ago.
The screen
We screened Standard & Poor’s 500 stocks focusing on the following criteria:
· Three-month price-to-earnings (P/E) change lower than 5 per cent. We want a company with downtrending valuation;
· Positive three-month current operating value (COV) growth. We want a company with improving fundamentals. The COV is based on discounted cash flow with no growth. The parameters are determined automatically by our platform. It is an approach to evaluate the minimum value of a business;
· Three-month sales growth higher than 4 per cent. We want a growing company;
· Economic performance index (EPI) higher than 1.25. This is the return on capital divided by the cost of capital. A value higher than one demonstrates a company’s ability to create value for its shareholders.
For informational purposes, we have also included the P/E ratio, three-year median P/E ratio, one-year price return, market capitalization and dividend yield. Please note that some ratios may be reported 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. 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) | P/E CH. 3M (%) | COV GRTH (%) | 3M SALES GRTH. (%) | EPI | P/E | P/E (3Y MEDIAN) | DIV. YIELD (%) | 1Y PRICE RTN. (%) |
| NFLX-Q | Netflix, Inc. | 535.98 | 237645 | -23.3 | 4.3 | 5.6 | 1.6 | 63.1 | 84.6 | N/A | 2.0 |
| NKE-N | Nike, Inc. Class B | 161 | 254219 | -17.7 | 8.9 | 15.8 | 2.6 | 44.2 | 46.3 | 0.7 | 66.9 |
| ETSY-Q | Etsy, Inc. | 195.09 | 24549 | -11.5 | 3.8 | 18.7 | 2.1 | 50.3 | 63.5 | N/A | 86.6 |
| ABMD-Q | Abiomed, Inc. | 324.77 | 14703 | -7.9 | 0.9 | 4.3 | 1.6 | 65.0 | 62.0 | N/A | 22.8 |
| FDX-N | Fedex Corporation | 296.4 | 78647 | -7.0 | 4.3 | 6.7 | 1.4 | 15.2 | 26.5 | 1.0 | 89.7 |
| AMZN-Q | Amazon.com, Inc. | 3719.34 | 1874547 | -6.9 | 5.6 | 8.6 | 2.4 | 69.4 | 77.8 | N/A | 19.8 |
| ABT-N | Abbott Laboratories | 119.74 | 212756 | -6.1 | 17.0 | 7.9 | 1.6 | 37.3 | 52.2 | 1.5 | 28.6 |
| PKI-N | Perkinelmer, Inc. | 153.96 | 17254 | -5.9 | 35.7 | 17.3 | 2.7 | 16.0 | 38.7 | 0.2 | 47.3 |
| QCOM-Q | Qualcomm Inc | 141.43 | 159674 | -5.7 | 6.1 | 10.2 | 2.2 | 19.9 | 25.7 | 1.9 | 54.9 |
| CINF-Q | Cincinnati Financial Corpora | 118.87 | 19138 | -5.3 | 94.8 | 30.9 | 2.6 | 6.2 | 13.8 | 2.1 | 69.6 |
| CDNS-Q | Cadence Design Systems, Inc. | 138.5 | 38540 | -5.2 | 2.6 | 4.4 | 1.5 | 58.0 | 43.2 | N/A | 39.8 |
What we found
The leading streaming service, Netflix Inc. had the largest P/E decline in the past three months while registering 4.3 per cent growth in its COV. Many players have joined the streaming party over the past few years: Amazon Prime, Disney+, HBO and many others. But Netflix still has the largest content library and continue to fuels it with aggressive investments by acquiring or developing new series and movies.
The company spent US$11.8-billion on its content last year alone despite COVID-19 disruption in the film industry. Since 2018, Netflix’s gross margin has increased by 1 per cent each year, meaning a dollar spent on content has produced more and more additional revenue. As the saying goes: Content is king.
The multinational sporting goods company Nike Inc. had a strong year as consumers rushed to buy sports equipment during the pandemic. In its most recent quarter, the company again beat analyst estimates with diluted earnings of 93 U.S. cents a share versus 51 U.S. cents expected.
Over time, Nike has allied itself with many professional athletes who have contributed to the brand’s recognition. This recognition by consumers can be seen in the EPI of 2.6. Customers are potentially willing to pay more for Nike’s products than competing ones, which creates value for its shareholders. The company’s robust short-term results forced our algorithm to readjust its assumptions resulting in a 8.9-per-cent increase in the COV in just there months.
Etsy Inc. and Amazon.com Inc. have similar profiles. Etsy connects buyers and sellers, and offers mostly handmade and vintage items on its platform, while Amazon follows the equivalent process, but with a much wider variety of products. Amazon also has a huge division offering cloud computing services.
Both companies have benefited from the shift in consumer habits toward e-commerce. Is their growth borrowed or has the pandemic accelerated the transition to online shopping?
Close to a year and half after the start of the pandemic, Etsy’s three-month sales growth of 18.5 per cent and Amazon’s 8.5 per cent expansion show no signs of going backward. But both companies are also selling below their historical P/E ratios: 50.3 today for Etsy, versus 63.5 historically, and 69.4 for Amazon, versus 77.8 in the past. The lower valuations may indicate the market is not convinced growth can continue at the rates seen in recent years.
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/
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