What are we looking for?
High-quality U.S. companies (including American depositary receipts, or ADRs) showing aggressive growth over 12 and 24 months. Two weeks ago, we focused our screen on high-quality companies trading at low valuation multiples. This week, we do the opposite: Our only concern is growth, so don't be surprised by the fact that most of the stocks trade above 30 times their earnings.
The screen
We searched all companies trading on a U.S. stock exchange by looking at the following metrics:
- A market capitalization of minimum $5-billion (U.S.);
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.5. 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);
- EPI growth on 12 and 24 months (figure must be positive);
- A return on capital of 10 per cent or greater;
- A positive ROC growth on 12 and 24 months;
- A minimum 12-month sales growth of 10 per cent, and of 20 per cent or better on 24 months;
- Positive free-cash-flow to 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.
The dividend yield and price-to-earnings ratio are 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 6,500 companies (Canadian and U.S. stocks and ADRs), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
Out of our universe of 3,900 U.S. companies, only 11 made the cut. Some of you might think that too many stocks on that list trade at "unreasonable" price-to-earnings ratios, but this is what the growth at reasonable price (GARP) strategy is all about. If we ignore Incyte Corp.'s P/E, which is extreme, the rest of the group trades at an average P/E of 26.1, which is barely above the S&P500 P/E of 24.3. Now, if we look at our group's 12 month sales growth, it averaged 29 per cent. As of December, 2015, the average S&P 500 12-month sales growth was minus 3.11 per cent.
Also, keep in mind that our group generates high economic profits for their shareholders given how high their return on capital is versus their cost of capital; the average EPI of 2.2 generated by these 11 companies is twice as high as the S&P 500's (1.1).
So, coming back to valuation, would you prefer buying an index that generated negative sales growth in 2015 and trading at a P/E of 24.3, or a group of high-quality and fast-growing companies trading at a P/E of 26.1? It all depends on your strategy and investment philosophy. An obvious reason to prefer the S&P500 could be the need for income since you'll note that very few stocks in our list pay dividends. Fast-growing companies usually prefer to reinvest in their capital all the cash they generate to fuel their growth.
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.