What are we looking for?
Today, we are looking for U.S. mid-cap companies showing high economic performance and growth while trading at reasonable valuation multiples.
The screen
We have screened our U.S. universe (5,700 stocks) with the following criteria:
A market capitalization between $1-billion and $5-billion (U.S.);
An economic performance index, or EPI (return on capital divided by cost of capital) of at least 1.5. 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);
A positive 12-month EPI change;
A return on capital of 12 per cent or greater;
A positive 12-month return on capital change;
A positive 12-month sales change;
A future growth value between minus-50 per cent and plus-30 per cent. The FGV represents, in percentage, the portion of the total market value that exceeds the company's current operating value. The higher the number, the higher the baked-in premium for expected growth is, and the higher the risk. A negative number reflects a discount.
Positive free cash-flow to capital ratio. 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;
All companies must pay a dividend.
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 7,500 companies (Canadian stocks, U.S. stocks and U.S. depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Fifteen companies match our list of criteria. Valero Energy Partners, owned by Valero Energy Corp., comes up as the highest economic performer of the group with an EPI of 3.2, but is also the one trading at the highest premium with a future growth value (FGV) of almost 30 per cent, our upper limit in this filter.
InterDigital, a designer and developer of mobile/wireless advanced communication technologies, offers a very interesting balance of economic performance and growth while trading at a low 3.5-per-cent FGV premium. In other words, as long as the company grows by at least 3.5 per cent in a near future, the current stock price is either fair or even discounted. The stock had an incredible run of around plus-100 per cent in 2016, but given the growth potential of the "intelligent" networks and technologies industry, InterDigital could be well positioned to also perform in the long run.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst at Inovestor Inc.