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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.

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About the Author
Portfolio Manager

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. Mr. Bowman has 30 years experience as an investment adviser and financial planner serving both individual and corporate accounts. More

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