What are we looking for?
U.S. companies that appear to be attractively priced and that also offer a margin of safety.
The Screen
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At Wickham Investment Counsel, we have developed our own Canadian Safety and Value strategy. This week, my colleague Allan Meyer and I thought we would apply the same criteria to U.S. companies. We screened stocks on a variety of safety and value metrics and arrived at a 30-company U.S. portfolio. The accompanying table shows the largest 25 of these businesses by market capitalization. Some of the metrics we used to arrive at the list:
- Free cash flow to enterprise value shows how much free cash a company produces in relation to the total market value of its equity and net debt. A higher number is better.
- P/E ratio is the earnings-per-share estimate for the next 12 months divided by the current share price. A low number is favoured.
- EBITDA (earnings before interest, taxes, depreciation, and amortization) to total interest expense shows how many times EBITDA covers the interest costs. A high number is better.
- Debt-to-equity ratio indicates what portion of equity and debt the company is using to finance its assets. A high debt-to-equity ratio generally means that the company has been aggressive in financing its growth with debt. A low number is preferred.
Price-to-book (P/B) compares a company’s market value to its book value, where book value is the net asset value of the company. A low number is best.
What did we find?
While a back test is no indication of future results, the U.S. Safety and Value Strategy returned over 570 per cent during the past 10 years, beating the S&P 500, which rose only 103.6 per cent. While the hypothetical return was impressive, commission costs are not included, and the turnover ratio was quite high.