Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.
What are we looking for?
Marketing company Wishpond reported that 66 million Americans spent an average of $135.27 (U.S.) each on purchases last year during the holiday shopping frenzy known as Black Friday. Online spending increased 18.5 per cent over 2012, and 25 per cent of those buys came from a smartphone.
Since Black Friday is fast approaching (this year it falls on Nov. 28, always the day after U.S. Thanksgiving), my colleague Rob Belanger and I thought we would take a look at the U.S. retail sector.
The screen
We started with companies over a billion dollars in market capitalization and sorted them according to size.
The EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is a value ratio that looks at a firm the way a potential acquirer would, because it includes debt. A low number is preferred. The companies all had to have a positive one-year sales growth, and a one-year earnings per share (EPS) growth of more than 10 per cent.
Operating profit margin is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating profit margin of 5 per cent it means that it makes 5 cents before interest and taxes for every dollar of sales. All those on the list had to have an operating margin of greater than 5 per cent.
Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over the past 12 months. A low turnover implies poor sales, and only those companies showing a turnover of 2.5 times or greater are included.
Return on assets (ROA) is an indicator showing how profitable a company is relative to its total assets. It gives an idea as to how efficient management is at using those assets, and a high number is preferred.
Return on equity (ROE) shows whether a company is a profit creator or a profit burner. All those on the list had to have an ROE greater than 15 per cent.
What did we find?
Polaris Industries designs, manufactures and markets high performance motorized products worldwide. The company scored better than the average in six of the seven categories.
Two companies scored better than the averages in five of the seven categories. Ross Stores Inc. operates more than 1,100 off-price apparel and home fashion stores in 33 states, and Gap Inc., founded in 1969, has about 3,200 company-operated stores and almost 400 franchise stores around the world.
Investors should do further research or contact an investment professional before buying any of the companies mentioned here.