What are we looking for?
U.S.-listed value stocks that may be poised to outperform their momentum stock peers in 2018.
Since the financial crisis in 2008, U.S. momentum stocks have dramatically outperformed their value stock peers. High growth stocks such as Facebook, Amazon, Apple and Alphabet have led the market higher, while value stock in the utilities, financial services and materials sectors have lagged. Over the past five years, the iShares S&P 500 Growth ETF has surged by 110 per cent whereas the iShares S&P 500 Value ETF has delivered a much more modest 66-per-cent return. As U.S. valuations become stretched and the economic cycle begins to change, many market watchers believe that value stocks will begin to outperform once again.
We will be using Recognia Strategy Builder to search for U.S.-listed stocks matching traditional value-investing criteria. Value investors typically focus on companies with modest valuations, low debt and an attractive dividend.
We begin by setting a minimum market cap threshold of US$10-billion. This will focus our search on very large cap stocks, which typically have higher quality revenue streams than their smaller counterparts and also have a track record of performance.
Next, we will look for companies with a dividend yield of at least 2.5 per cent and a debt-to-equity ratio of 1.5 or less.
Finally, to focus on companies with reasonable valuations, we will screen based on two widely used valuation metrics: a forward price-to-earnings ratio of less than 20 and a price-to-book ratio of less than 1.75.
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?
Topping our list is insurance giant MetLife Inc. with more than 90 million customers in 60 countries. MetLife looks well valued by most metrics and has a very low forward P/E ratio at 10.8. On Jan. 30, the stock dropped nearly 9 per cent on news that the company was delaying its fourth-quarter earnings by two weeks to review its internal accounting controls.
Agribusiness firm Archer Daniels Midland Co. also makes our list with a low P/E of 16.7 and a price-to-book ratio of 1.4. ADM stock has struggled over the past year, down 5 per cent on the year. This has resulted in a very attractive valuation and 3-per-cent dividend yield.
Duke Energy Corp., the largest company on our list, also has the highest dividend yield. Duke is the one of the biggest electric power holding companies in the United States with operations in Canada and Latin America as well. It has an attractive 4.6-per-cent dividend yield and is currently trading down more than 13 per cent from its 52-week high.
It's also noteworthy that two well-known Canadian companies listed on the NYSE made this value screen: utility Fortis Inc. and insurance giant Manulife Financial Corp.
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.
Select U.S.-listed large-cap value stocks
|Rank||Company||Ticker||Market Cap. (US$Bil)||Recent Price (US$)||Fwd P/E Ratio||Price/Book Ratio||Debt to Equity Ratio||Div. Yield|
|2||Manulife Financial Corp.||MFC-N||$42.6||$21.23||11.8||1.49||0.31||3.0%|
|3||Newell Brands Inc.||NWL-N||$12.6||$26.44||8.8||1.09||0.90||3.3%|
|4||Prudential Financial Inc.||PRU-N||$51.5||$118.82||11.8||1.14||0.67||2.5%|
|5||Archer-Daniels Midland Co.||ADM-N||$23.8||$42.95||16.7||1.42||0.42||3.0%|
|6||Duke Energy Corp.||DUK-N||$54.4||$78.50||17.1||1.32||1.28||4.6%|
|10||Consolidated Edison Inc.||ED-N||$24.7||$80.36||19.7||1.70||1.04||3.4%|