What are we looking for?
Dividend-paying middle- and large-cap U.S. stocks that have experienced a large drop in price this quarter and are considered undervalued compared with their historical price-to-earnings (P/E) average.
The screen
Valuation analysis is used to determine whether a stock is undervalued or overvalued. This can be conducted by comparing a company's valuation ratios against its peers or, as in today's case, against its own historical average of the ratio.
Our screen tries to find bargains in the area of U.S. mid- and large-cap stocks. We begin by identifying companies with a market capitalization above $1-billion (U.S.) that are paying a dividend of at least 1 per cent.
Next, we're looking for stocks that have declined more than 20 per cent in the quarter-to-date on a price-only (as opposed to total) return basis. Finally, we're adding a filter to find companies that have a current forward P/E ratio that is less than its respective five-year average of the same metric.
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, our screen identified 11 companies meeting the criteria above. It's worth noting that seven of the companies in the results belong to the specialty and multiline – think department stores for the latter – retail industries. From March 30 to May 30 of this year, the S&P 500 specialty retail and S&P 500 multiline retail indexes have dropped approximately 3 per cent and 12 per cent, respectively – largely due to poor earnings results.
The U.S. economic outlook for retailers doesn't seem as bad as the market is discounting. In fact, the latest first quarter U.S. GDP report last week showed that consumer spending increased by 1.9 per cent. Furthermore, the unemployment rate in the United States remains low at 5 per cent and retail sales rose 1.3 per cent in April – the largest jump since March, 2015. Finally, consumer confidence for May, measured by the University of Michigan index, hit 94.7, which is the highest level in 11 months.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio.
Investors should conduct further research before investing.
Patrick Gattuso, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.