What are we looking for?
Just ahead of Black Friday (the day after Thanksgiving Day in the United States), we screen a dozen of the most popular U.S. consumer goods companies to compare them on different criteria.
The screen
We examine these 12 consumer goods stocks based on economic performance, value and accounting performance using the following metrics:
- economic performance index, or EPI (return on capital divided by cost of capital). An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- trailing 12 months’ EPI change. A positive result indicates a strengthening economic performance;
- return on capital – this ratio tells how well the company is using its money to generate returns. The higher the percentage, the better;
- future growth value (FGV) – the number reflects the portion of the stock price the investor is paying for expected growth. A positive number translates into a premium, and a negative number shows a discount. An FGV below minus 50 per cent could reflect a too-big discount (value trap), and an FGV of 60 per cent or above reflects a premium we would consider hard to justify;
- current dividend yield and the five-year average dividend growth rate;
- free cash flow divided by invested capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good – 5 per cent and above is excellent.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
TJX Cos. Inc., Ross Stores Inc. and Home Depot Inc. clearly stand out. All three generate an EPI above 2.5, which we consider excellent. They also offer a return on invested capital above 20 per cent, huge free cash-flows and five-year average dividend growth rates between 19 per cent and 24 per cent.
For value-oriented investors, Wal-Mart Stores Inc. and Macy's Inc. could be the most interesting picks. They are the only two companies trading at a discount, as shown with the FGV. They also offer the two highest dividend yields out of this group.
Under Armour Inc. and Amazon.com Inc. are trading at very high premiums, at an 80 per cent and 75.1 per cent FGV respectively. In other words, only 20 per cent of Under Armour's stock price, for example, is justified by its current operating value. Fully 80 per cent is the portion of the stock price paid for expected growth, a number we consider quite high; the higher the expectations are, the bigger the chances of disappointment.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.