What are we looking for?
U.S. consumer non-cyclical stocks with strong earnings, low debt and reasonable valuations.
The S&P 500 is up about 10 per cent since the start of the year, capping an eight-year run of strong performance. For much of 2017, consumer non-cyclical companies such as household products and food and beverage makers have lagged the broader market. In fact, this sector had the worst performance of all U.S. sectors over the past month. With many of these non-cyclical companies also deemed to be defensive, one might wonder whether they now represent good value, in light of the lofty valuations in the U.S. market.
The screen
We will be using Recognia Strategy Builder to search for well-valued U.S. non-cyclical consumer stocks.
We begin by setting a minimum market capitalization threshold of $10-billion (U.S.) to focus on larger, more stable and established companies in the sector. Next, we will look for companies with reasonable valuations based on their forward price-to-earnings ratio. We will select only companies with a forward P/E ratio of 25 or less. To focus on companies with a track record of growing earnings, we will also filter for five-year EPS growth rates of 7 per cent or more.
With an eye to finding companies with efficient operations, we will also screen for companies with return on equity of 10 per cent or more. Return on equity measures how efficiently a company uses invested capital to generate income.
Finally, in light of an increasing interest rate environment, we wish to select companies with low levels of debt, for example, those with a debt to equity ratio of 1.5 or less.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
The lowest forward P/E ratio on our list belongs to Tyson Foods. Tyson is the world's second-largest chicken and beef processor operating under brands such as Jimmy Dean and Hillside Farms. On Aug. 7, Tyson reported third-quarter results that beat analyst expectations for both revenue and EPS.
The largest company on our list is consumer-products giant Procter & Gamble with a market cap in excess of $235-billion. Procter and Gamble is a defensive stalwart and has a long track record of growing dividends. Today, the stock has a very respectable 3-per-cent dividend yield.
The highest return on equity on our list belongs to Constellation Brands, a worldwide producer of beer, wine and spirits. Unlike many of the companies in this sector, Constellation stock has done well, up 9.2 per cent in the past three months and 30 per cent year to date.
Historical performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 12.1-per-cent annualized return compared with 11.7 per cent for the S&P 500 and 10.8 per cent for the Dow Jones industrial average.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.