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What are we looking for?

Sometimes investors seem to forget that a company's shares represent a fractional ownership in an underlying business. They focus on short-term factors and trade excessively – rather than taking the longer-term approach of a business owner. Such trading can cause big fluctuations in stock prices that may not reflect the true value of the business.

With this in mind, today I look for large-cap U.S. and Canadian companies ($25-billion or more) that may miss earnings in the next quarter, yet offer long-term growth prospects for patient investors.

The screen

We screen for companies trading at least 15 per cent below their 52-week highs to identify relative bargains. Secondly, we look for firms that could be expected to have an earnings miss for the next quarter. For this, we use the Thomson Reuters Smart Estimate, which places greater weight on analysts who have a stronger predictive power based on the accuracy and timeliness of past forecasts.

The firms must have 10-year annual earnings-per-share growth rate of at least 10 per cent and a price-earnings ratio of less than 20. These components ensure a set of companies with a track record of growth and that trade at reasonable earnings multiples.

More about Thomson Reuters

Thomson Reuters delivers trusted news and intelligent information to more than one billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.

What did we find?

Using Thomson Reuters Eikon, I found 12 companies that fit these criteria. Precision Castparts Corp. is a manufacturer of forged metal components and products for the aerospace and industrial sectors. Its shares have sunk more than 20 per cent from their 52-week high amid a recent debt issue and weaker-than-expected revenue for their aerospace and oil segments. Despite that, Precision Castparts has industry-leading profit margins and lower leverage than its peers. The company plans to continue to grow by acquisitions and to maximize efficiency. Value investors have taken notice as Warren Buffett's Berkshire Hathaway Inc. is now one of the largest shareholders of the company.

Canadian National Railway Co.'s intermodal transportation network spans North America. Shares of rail companies are down about 25 per cent, on average, from their 52-week highs because of weaker commodity shipping, but CN's strong earnings growth and low operating ratio (operating expenses divided by revenues) offers long-term investors an attractive entry point.

Readers should conduct their own research before investing.

Charles Martin, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.

Large caps for the patient investor