What are we looking for?
Consumer staples with a balanced exposure to performance and risk.
The U.S. yield curve inverted at the beginning of April, which is a signal that a U.S. recession could be ahead in the next 12 to 18 months. In addition, inflation in basic needs such as food, housing and energy, combined with higher interest rates, could significantly erode discretionary purchasing power.
We believe that consumer staples is the most likely sector to offer resilience in this environment.
The screen (add this screener here)
We screened U.S. stocks in the consumer staples sector focusing on the following criteria:
- Market capitalization higher than US$1-billion;
- StockPointer (SP) performance score higher than 65. The score mainly considers risk-adjusted return on capital, earnings per share growth, and free cash flow per share. The score varies between zero and 100. A score above 65 implies a well-performing company;
- StockPointer (SP) risk score lower than 35. The risk score is scaled from zero to 100 where 100 is a high-risk company. 35 is considered low-risk. The score takes into account many criteria; our software looks at leverage and stability of profitability, and uses an automatically calculated discounted cash flow to evaluate the expensiveness of the company;
- positive five-year earnings-per-share growth. We look for a company that demonstrated improvements over the past five years;
- SP performance score minus SP risk score, which is how the stocks are ranked.
For informational purposes, we have also included trailing 12 months’ return on capital, price-to-earnings, dividend yield, and one-year price return. Please note that some ratios maybe shown as of end of 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.
What we found
Tobacco manufacturers Vector Group Ltd. and Philip Morris International Inc. rank No. 1 and No. 3 in our performance-minus-risk ranking, at 60.3 and 57.1 respectively.
Vector also ranks first in terms of dividend yield (6.6 per cent), while Philip Morris has the highest return on capital on our list, at 26.9 per cent.
Tobacco stocks have their risks related to regulation as well as ethical or sustainable investing issues, but for those comfortable with them, they offer significant downside protection in case of lower discretionary spending.
Tyson Foods Inc., a processor and marketer of chicken, beef and pork, has the lowest P/E of our screen at 8.7. This low valuation could be explained by the multiple price-fixing lawsuits filed in recent years. However, that didn’t stop Tyson from generating a healthy price return of 20.7 per cent over the past year. The combination of strong performance and a cheap valuation could have potential for defensive investors.
Church & Dwight Co. Inc., well known for its Arm & Hammer home and personal care products, seems a bit expensive with a P/E of 31.2, and a risk score that reflects that higher valuation at 31.6. On the other hand, the company has a solid brand, which is indicated in its financial metrics: the second-highest performance score of our list at 78.9 with an EPS that has increased by a respectable 13.7 per cent over the past five years on an annual basis.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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