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What are we looking for?

With the S&P 500 now trading at more than 25 times its earnings, and adding to this some global political uncertainty, many investors are shifting from a growth/momentum approach to value investing. Today we are looking for stocks included in the S&P 500 that trade at low multiples while also offering a robust economic performance.

The screen

We have screened the S&P 500 with the following criteria:

  • An economic performance index, or EPI (return on capital divided by cost of capital), of at least 1.0. 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 (or at least not negative) change in return on capital over the past 12 months;
  • A maximum price-to-earnings ratio of 18;
  • A future growth value between negative 50 per cent and positive 20 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/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;
  • All companies must pay a dividend;
  • The 52-week price performance is displayed for informational purposes.

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 American 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.

Alaska Air Group Inc. comes up as the highest economic performer of the group with an EPI of 2.9. Even after a 35.5-per-cent increase in the past 52 weeks, the stock is still trading at a relatively low P/E ratio of 13.2. The company also generates the highest free cash-flow to invested capital ratio, which has allowed for regular dividend increases and share buybacks in the past five years (not shown in table).

Wal-Mart Stores Inc. and Target Corp., which are suffering from's increasing online market share, still offer good economic performance, high free cash flows and a high dividend yield. Investing in one of these two companies requires patience and a long-term view, as it might take a few years for them to adapt to Amazon's online business and generate higher revenue growth rates. Foot Locker Inc., which also offers one of the highest EPIs and good free cash flow, is an interesting way for investors to indirectly invest in Nike, Under Armour or Adidas AG, which trade at much higher multiples.

Investors are advised to do additional research prior to investing in any of the companies mentioned.

Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.

S&P 500 stocks that offer good value

CompanyTickerEPIROC CHG/12MPrice/
FGV% on MKt ValueFCF/CapitalDiv. Yield %52WK Price Perf.
Alaska Air Group Inc.ALK-N2.93%13.20.0%15.4%1.2%35.5%
Wal-Mart Stores Inc.WMT-N2.20%14.2-19.2%10.5%3.0%-0.6%
Hanesbrands Inc.HBI-N1.90%17.511.6%4.7%2.6%-25.6%
H & R Block Inc.HRB-N1.81%14.0-13.7%2.7%4.0%-35.8%
Foot Locker Inc.FL-N1.80%14.62.0%6.4%1.6%0.2%
Target Corp.TGT-N1.71%11.6-8.2%6.5%3.8%-12.0%
Entergy Corp.ETR-N1.63%9.8-48.7%N/A4.9%-0.2%
Kroger Co.KR-N1.61%15.82.5%0.9%1.4%-14.4%
Ford Motor Co.F-N1.63%10.8-47.9%4.8%4.9%3.8%
TE Connectivity Ltd.TEL-N1.67%13.25.5%4.2%2.0%29.4%
Scana Corp.SCG-N1.41%17.2-4.4%N/A3.4%8.7%
PPL Corp.PPL-N1.43%12.6-8.5%N/A4.4%-2.2%
Baxter Intl Inc.BAX-N1.46%5.3-2.6%2.4%1.1%27.8%
Assurant Inc.AIZ-N1.28%10.3-6.8%N/A2.2%19.3%
Tegna Inc.TGNA-N1.11%10.6-18.8%3.3%2.5%-5.4%

Source: StockPointer