What are we looking for?
Could the top-performing equities of 2018 be the "dogs," or worst performers, of 2017?
As a follow-up on my previous column in January focusing on TSX-listed stocks, today, my associate Allan Meyer and I take a closer look at some of last year's U.S.-listed "dogs," once again using our investment philosophy focused on safety and value.
The screen
We limited our search to equities in the S&P 500 index, which comprises some of the world's largest companies by market capitalization. We view this as a safety factor; larger companies tend to be more liquid while having more stable and consistent revenue streams.
To find our "dogs," we looked at companies with 52-week total returns of negative-15 per cent or worse. (Note that in order to have the most up-to-date data, the list covers the most recent 52-week period and not calendar 2017 but is still, we believe, supportive of the general theme.) The list is sorted on this metric.
Allan and I love to get paid while we wait for capital appreciation, and dividends generally reflect safer and more reliable earnings profiles.
Dividend yield is the projected annualized dividend divided by the share price.
Our list is limited to dividend payers.
Our investment philosophy is focused on value; we're always trying to buy at a discount or "sale."
We believe most people are like us and appreciate getting a deal. Price-to-earnings (P/E) is the share price divided by the projected earnings per share. It is a valuation metric – the lower the number, the better the value.
All companies in our screen must have positive earnings – and, therefore, a positive P/E ratio.
Earnings momentum is the change in annualized earnings over the past quarter.
A positive number means earnings are growing, while the opposite is true for a negative number. Earnings increases should lead to long-term price appreciation and perhaps dividend hikes, vice versa for earnings decreases.
Lastly, we looked at debt to equity. It's a safety measure, the lower the ratio, the lower the leverage or debt levels. It's difficult to go bankrupt if you don't have any debt obligations.
What did we find?
Seventeen stocks made our screen, based on the above criteria.
Newell Brands Inc. and Allergen PLC score well on most safety and value measures. Range Resources Corp. could be a play on believers of an energy rebound. Signet Jewelers Ltd. and Viacom Inc. look like deep value plays as they are among the cheapest on the list. However, the debt level of Viacom should be noted as it is one of the highest on the list.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.