What are we looking for?
Following up on our previous look at well-priced, low-beta Canadian companies, we've searched the S&P 500 to find similar U.S. companies that also offer value-creating economic performance.
The screen
We searched the S&P 500, filtering for the following metrics:
– beta below 1.0; (A beta of 1.0 indicates a stock is trading in line with the market – the lower the beta, the less volatile);
– Future growth value divided by market value of total capital (FGV/MV), a ratio that helps determine whether the stock is trading at a discount or premium to the current value of the company's operations. We filtered for a maximum premium of 25 per cent (negative values indicate a discount);
– a price/intrinsic value (P/IV) ratio of 1.0 or less;
– positive EVA growth over the past 12- and 24-month periods. EVA (which stands for economic value added) is a measure of true economic profit created by a company. EVA is calculated by subtracting capital charges from the net operating profit after tax;
– economic performance index, or EPI (return on capital divided by cost of capital). A ratio above 1.0 indicates wealth creation (and positive EVA);
– return on capital greater than 10 per cent.
We also show each stock's price-to-book-value ratio.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
With five financial companies out of the 10 results, this tells a similar story to our previous Canadian filter – which was also overweight financials – though we see a higher prevalence of insurance companies versus banks in the U.S. filter. Of the five financials, Progressive Corp. offers both the lowest beta and the highest dividend yield.
Travelers Cos. Inc. trades at the most substantial discount of the group (FGV/MV at minus 14.3 per cent), and has a slight leg up on Allstate Corp. in most other metrics shown. Keep an eye on these three insurance providers with any changes in the current U.S. interest rate environment.
Gilead Sciences Inc. and AutoZone stand out from the group by their high return on capital, and high EPI. Both create great value for their shareholders, though neither offer a dividend. Gilead trades at a slight discount of (FGV/MV at minus 2.1 per cent). AutoZone trades at a premium of 22.6 per cent but has the lowest beta by a large margin. We'll note however that neither of the two present a favourable price/book value ratio relative to this group.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Nick Winch is an account manager for StockPointer at Inovestor Inc.