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What are we looking for?

Undervalued middle- and large-cap retailers in Canada and the United States that are expected to beat earnings estimates for this quarter.

The screen

With Black Friday this week and Christmas just around the corner, the focus in business media will be on retailers and the impact sales will have on fourth-quarter earnings. Taking a step back, it's worth noting we're still in the midst of third-quarter reporting. In terms of middle and large capitalized retailers, 68 per cent of companies have reported third-quarter earnings thus far and it's been a mixed bag – 54 per cent of companies beat, 15 per cent met and 31 per cent missed earnings estimates. In terms of price action, it's important to note that retail stocks rallied in the days following U.S. president-elect Donald Trump's victory, as his plan to reduce taxes for corporations and wealthy individuals could increase consumer spending – a positive for retailers and department stores.

Our screen begins by identifying companies trading in North America with a market capitalization above $1-billion (U.S.). Next, we're looking for positive upcoming earnings surprises for the current quarter by comparing the mean analyst estimate for earnings a share with a Thomson Reuters proprietary, Smart Estimate for EPS, which is essentially a weighted-average EPS estimate dependent on analyst accuracy and estimate age. The difference between the mean estimate and the Smart Estimate is known as the "predicted surprise."

Finally, the screen is filtering for companies with a forward price-to-earnings ratio that is less than the median of the industry.

More about Thomson Reuters

Thomson Reuters delivers trusted news and intelligent information to more than one billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.

What did we find?

Using Thomson Reuters Eikon, our screen identified 12 companies that meet the screen criteria. The list is sorted by predicted surprise (in percentage terms) in descending order.

The only domestic name on the list is Canadian Tire Corp., one of the largest retailers in Canada. The company recently announced third-quarter earnings that beat expectations on EPS ($2.44 [Canadian] versus the consensus estimate of $2.40). The stock is up more than 20 per cent so far this year on a total return basis but still considered undervalued relative to its peers. Furthermore, management announced the company will hike its dividend and repurchase shares – both positive messages to investors.

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

Disclosure: The author personally owns shares in Canadian Tire.

Patrick Gattuso, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.

Select undervalued North American retail stocks

CompanyTickerMkt Cap ($Bil U.S.)EPS: Predicted Surprise (Next Qtr)Fwd P/E (Company)Fwd P/E (Industry)YTD Ttl Rtn
Office Depot Inc.ODP-Q2.474.2%10.3415.95-16.5%
J.C. Penney Co. Inc.JCP-N2.911.8%17.0418.6442.2%
Dillard's Inc.DDS-N2.421.3%12.2918.648.1%
Liberty Interactive Corp.QVCA-Q13.871.3%18.4918.64-22.9%
DSW Inc.DSW-N1.881.3%15.0915.59-1.5%
Aaron's Inc.AAN-N2.070.9%11.9113.0230.0%
Target Corp.TGT-N42.950.7%14.0119.998.3%
American Eagle OutfittersAEO-N3.290.6%13.0715.5919.3%
Foot Locker Inc.FL-N9.560.4%13.9215.5912.2%
Big Lots Inc.BIG-N2.270.1%13.3319.9934.2%
Macy's Inc.M-N13.270.1%12.2818.6426.9%
Canadian Tire Corp.CTC.A-T7.600.1%14.2218.6421.4%

Source: Thomson Reuters Eikon