What are we looking for?
Large cap companies in the United States that offer good protection during volatile times due to their sound balance sheets, high earnings growth, strong profitability and sustainable earnings.
The screen
As economic risk begins to escalate in financial markets, investing in solid and established companies is an essential step in protecting portfolios.
The screen begins by identifying companies headquartered in the United States that have a market capitalization above $10-billion (U.S.) with strong balance sheets and robust profitability. This was determined by screening for companies with a cash position greater than long-term debt, a debt-to-equity ratio of less than 100 per cent, and a five-year average return on equity (ROE) greater than 20 per cent. The five-year average ROE measures the profit a company has generated with the money invested by shareholders over the past five years.
Next, we factored in earnings growth by creating a customized ratio of growth to price-to-earnings. Growth is determined by the estimated earnings growth next year combined with the company's current dividend yield. This number is then compared to the company's P/E ratio. Essentially, we are looking for a number greater than one, implying that the companies are growing faster than their respective P/E ratios.
Finally, we integrate a Starmine Earnings Quality Model, which focuses on the sustainability of a company's earnings. We are looking for a score above 90 (out of 100).
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What did we find?
The results identified seven companies that meet the screening criteria.
Johnson & Johnson stands out as operating in a more defensive industry and thus being less sensitive to economic cycles. Interestingly, JNJ's combined earnings growth rate and dividend yield is sitting at an impressive 2.95 times the P/E ratio.
Taking a look at a stock in a more cyclical industry, Boeing Co. has an Earnings Quality score of 97, implying highly sustainable earnings. Furthermore, Boeing has experienced an earnings per share compound annual growth rate of 31.6 per cent over the past five years.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.