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What are we looking for?

North American equities trading at attractive valuations relative to their sectors, and that have experienced upward analyst revisions.

The screen

Using the Thomson Reuters StarMine quantitative models, I screened for companies with a market cap greater than $1-billion (U.S.) that rank higher than most securities in their industries in terms of positive analyst revisions, sector-relative valuation and price momentum.

StarMine's Relative Valuation model combines six valuation ratios into a single measure – enterprise value-to-sales; enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation and amortization); price-to-earnings; price-to-operating-cash-flow; price-to-book; and dividend yield – to highlight the best value stocks. Trailing and forward-looking multiples are used, where the distribution of weight is based on analysts' ability to forecast the multiples in question. The Relative Valuation model accounts for sector-specific characteristics by comparing each company with its peers, thereby avoiding biases in our evaluation. For example, a large number of companies in the energy sector would appear expensive from a P/E perspective relative to all North American stocks.

The Analyst Revision model is designed to predict future changes in analyst sentiment; it is based on the premise that revisions occur in clusters, where past revisions by top-ranked analysts are highly predictive of future revisions by laggard analysts. We look at revisions covering companies' preferred component, that is, their most relevant estimate measure (revenue, EBITDA, or earnings per share) – allowing us to fine-tune the screen to company/sector specific key drivers.

While the StarMine Price Momentum Medium Term model compares a stock's 10-day average closing price with the average daily closing price over the past 30 trading days – identifying stocks in the midst of a trend reversal, or ones that may sustain their positive momentum. We screen for preferred earnings analyst revisions, sector relative valuation and price-momentum scores greater than or equal to 80 (companies ranking better than 80 per cent of their peers across the three measures).

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What did we find?

We've limited our results to the largest 15 companies ranked by market capitalization. It is worth noting that no energy sector constituents met all our criteria, although a number of companies such as Suncor Energy have been the subject of upward analyst revisions since December, indicating they've been excluded because of the price momentum component.

Only one Canadian-listed company made the cut, Teck Resources Corp.

This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.

Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.

Stocks that rank highly on positive analyst revisions, sector-relative valuation and price momentum

CompanyTickerMarket Cap ($Bil U.S.)SectorRel. Value Sector RankAnalyst Rev. Model Pref. Earns. RankExpected Report Date (FQ1)Price Momentum Mid-Term ComponentP/EDiv. Yield
Express Scripts Holding Co.ESRX-Q45.9Health Care999527/02/20189613.4n/a
Liberty Global PLCLBTYA-Q29.7Cons. Disc.948713/02/20189050.4n/a
American Airlines Group Inc.AAL-Q27.8Industrials889725/01/20188814.80.69
Kroger Co.KR-N26.1Cons. Staples959508/03/20189417.61.69
United Continental Holdings Inc.UAL-N22.8Industrials1009423/01/20189611.1n/a
AmerisourceBergen Corp.ABC-N22.4Health Care858306/02/20189463.21.48
Teck Resources Ltd.TECK.B-T20.9Materials939614/02/2018988.60.55
Seagate Technology PLCSTX-Q15.4IT989929/01/20189820.14.74
DaVita Inc.DVA-N14.5Health Care979514/02/20189730.2n/a
Kohls Corp.KSS-N11.5Cons. Disc.9010001/03/20189918.13.23
Carlyle Group LPCG-Q8.3Financials839207/02/20188713.55.05
Janus Henderson Group PLCJHG-N8.2Financials849106/02/20188332.53.11
Ternium SATX-N6.7Materials949520/02/2018887.93.01
United Therapeutics Corp.UTHR-Q6.2Health Care888920/02/20188312.6n/a
Foot Locker Inc.FL-N6.1Cons. Disc.869322/02/20189712.72.46

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