What are we looking for?
U.S.-listed stocks that are well positioned for future growth, have an established history of low earnings volatility and trade at attractive valuations.
We screen for stocks that have demonstrated a disciplined approach to earnings growth, combining reasonable valuations, strong underlying businesses with room for bottom-line expansion, positive investor sentiment and low leverage.
Consistent and reliable earnings indicate a lower probability of negative earnings surprises, and may attract institutional investors who prefer lower variations in earnings, in addition to potentially reducing borrowing costs. Our criteria cover valuation, trailing fundamentals, future growth and risk factors:
- Price-to-earnings and price-to-book value ratios less than the S&P 500 (20.6 and 2.82, respectively), and total debt-to-equity less than 1;
- Earnings-per-share five-year volatility less than the S&P 500 average (21.9 per cent);
- Short interest (percentage of shares outstanding sold short) less than the S&P 500 average (3.8 per cent);
- Positive earnings growth over the next 12 months;
- Trading price less than the average broker target price.
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What did we find?
Our screen yields 10 companies split evenly across defensive and cyclical sectors, and although the recent rally has favoured the latter, CVS Health Corp. stands out as it has underperformed the S&P 500 consumer staples index by a wide margin, returning double-digit declines on both a quarter and year-to-date basis versus the consumer staples index's gain of 2.5 per cent and a decline of 2.8 per cent, respectively.
CVS is a leading U.S. drug-store and pharmacy-benefit-management (PBM) operator, where lower forecasted revenue growth due to increased competition has driven negative returns this year as investor adjust expectations and valuations accordingly. Recent concerns over U.S. president-elect Donald Trump's comments targeting inflated drug prices drove a sell-off across the pharmaceuticals industry, which has extended to PBMs such as CVS because of fears they could be at risk.
This may have provided a lucrative entry point if this sell-off is overdone as PBMs play no active role in setting drug list prices, which are the responsibility of drug manufacturers.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.
U.S. stocks with a history of low earnings volatility
|Company||Ticker||Market Cap ($bil U.S.)||P/E||P/B||EPS Growth (Next 12M)||D/E||EPS 5Y Volatility||Price To Mean Price Target||Short Interest||QTD Price % Chg||YTD Price % Chg|
|Cisco Systems Inc.||CSCO-Q||150,894||14.4||2.4||2.6%||54.9%||8.5%||0.91||0.9%||10.7%||-5.2%|
|CVS Health Corp.||CVS-N||85,454||17.1||2.4||1.7%||74.4%||3.5%||0.92||1.2%||-18.0%||-10.0%|
|Bank of New York Mellon Corp.||BK-N||51,408||16.5||1.3||11.9%||84.2%||10.7%||0.96||1.5%||18.0%||21.9%|
|Mohawk Industries Inc.||MHK-N||14,823||16.8||2.6||7.1%||47.9%||5.6%||0.85||1.1%||5.5%||-0.2%|
|Sykes Enterprises Inc.||SYKE-Q||1,266||19.4||1.7||9.5%||37.5%||16.3%||0.94||1.1%||-4.1%||4.9%|
Source: Thomson Reuters Eikon