What are we looking for?
U.S. stocks with solid levels of profitability in comparison to their valuations.
You may recall that we performed a similar screen on Canadian stocks last week. The stocks that score well in this strategy have both high returns on equity and relatively low price-to-earnings ratios, as well as improving prospects. In other words, they churn out earnings but still appear relatively cheap.
More about today’s screen
Craig McGee, senior consultant at CPMS Morningstar Canada, created today’s offering.
He filtered the CPMS database of U.S. companies by each company’s ratio of trailing returns on equity (ROE) to price-to-earnings ratio. He looked for enterprises that:
- were members of the S&P 500;
- had a positive change in analysts’ consensus earnings estimates over the past 30 days.
Mr. McGee restricted any one sector to no more than four companies. The accompanying list shows the top 20 companies.
More about CPMS
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools. It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.
What did we find?
A diversified list of large U.S. companies with large profits and relatively low P/E ratios.
Readers should note that earnings are volatile. Before buying, be sure to do your own research.
That said, this strategy does hold promise, at least for nimble investors. Mr. McGee ran a back test beginning Dec. 31, 1993, in which he looked at the results for a hypothetical investor who followed this strategy and reselected an equally weighted 20-stock portfolio each quarter. Over the test period, the investor would have enjoyed an annualized total return of 14.1 per cent, well ahead of the S&P 500 total return index, which ticked in with a return of only 8.2 per cent. The portfolio outperformed the index in 78 per cent of years including all four years when the index was down.
U.S.-Listed Companies with Solid Profitability Relative to Valuation
|Company||Symbol||Price US$ (May 31, 2012)|
|Goodyear Tire & Rubber||GT-N||10.45|
|CF Industries Hldg Inc.||CF-N||170.96|
|Marathon Petroleum Corp.||MPC-N||36.07|
|RR Donnelley & Sons||RRD-Q||10.76|
|Deere & Co.||DE-N||73.87|
|Discover Fin'l Services||DFS-N||33.11|
Source: Morningstar Canada
|Company||Symbol||Price US$ (May 31, 2012)||Market Cap (US$ mil.)||ROE to P/E Ratio||Trailing Return on Equity||Trailing Price to Earnings||Earnings Revision Last 30 days||Total Return YTD|
|CF Industries Hldg Inc.||CF-N||170.96||11,221||5.5x||37.40%||6.8x||11.00%||18.50%|
|Marathon Petroleum Corp.||MPC-N||36.07||12,290||5.2x||27.00%||5.2x||9.80%||9.90%|
|RR Donnelley & Sons||RRD-Q||10.76||1,940||4.2x||23.30%||5.6x||2.20%||-21.80%|
|Deere & Co.||DE-N||73.87||29,683||4.0x||41.40%||10.2x||2.90%||-3.90%|
|Discover Fin'l Services||DFS-N||33.11||17,559||4.0x||29.90%||7.5x||1.00%||38.40%|
|First Solar Inc.||FSLR-Q||12.56||1,090||3.2x||9.80%||3.0x||0.50%||-62.80%|
|Dupont EI De Nemours||DD-N||48.26||45,222||3.0x||36.10%||12.0x||0.20%||7.30%|
|TJX Companies Inc.||TJX-N||42.46||31,461||2.6x||50.90%||19.8x||2.10%||32.20%|
|Goodyear Tire & Rubber||GT-N||10.45||2,557||10.4x||62.20%||6.0x||2.60%||-26.30%|