What are we looking for?
North American stocks with solid fundamentals and income to help weather a bear market.
North American indexes remain under pressure. Every attempt at a major rebound tends to reverse to the downside, a sign of a bear market. The S&P 500 index is down more than 3.2 per cent over the past five trading days, following the Nasdaq Composite Index, which is the worst performer, down nearly 4 per cent in the same period despite being up 10.9 per cent this year. Inflation fears remain in the headlines. Will interest rates continue to rise or will we see a pause for now? The market is leaning toward a pause. However, we at Trading Central like to be prepared for the worst-case scenario.
This week, we build a strategy that identifies North American-listed stocks that look attractive from a value, quantitative and income perspective.
The screen
We will be using Trading Central Strategy Builder to search for North American-listed equities that have the potential to weather a bear market because of the income and stability they offer.
We begin by setting a minimum market capitalization threshold of US$10-billion in order to screen for stocks that are well-established, which tend to have less risk and volatility than small-cap stocks.
Next, we will select only stocks with price-to-earnings ratios below the current P/E of the S&P 500 index, which sits at 20.18.
We were also interested in companies that are indicating a dividend yield that is above the average yield currently indicated for the S&P 500 index, which is at around 2.16 per cent, so we can be paid to wait for a rebound amid a bear market. We added a filter for dividend-paying stocks that are indicating an average dividend growth rate of at least 10 per cent over the past five years in order to find companies with a proven track record of sustaining and growing their dividend.
Finally, we screened for the top rated stocks using Trading Central’s Quantamental rating method. The TC Quantamental Rating is a proprietary stock-ranking methodology developed by Trading Central that covers more than 50,000 stocks worldwide. This metric ranks stocks on a scale of one to 10, with one being the most bearish and 10 being the most bullish. The rating uses a combination of valuation, growth, quality, price momentum and income as key metrics when ranking a company.
We have also included year-to-date and one-year returns for reference.
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.
What we found
Topping our list is Taiwan-based global semi-conductor company United Microelectronics Corp. UMC-N The company provides integrated circuits for applications throughout the entire electronics industry. The stock has a market cap of $20.27-billion, a P/E of just 7.4 and a dividend yield of 6.24 per cent. The stock has the third-highest TC Quantamental Rating on our list at 7.4, which is very strong. The stock price has rebounded by more than 50 per cent from its Oct. 11 low as the price rebound continues to trend higher, returning an impressive 22.7 per cent year-to-date, the highest on our list.
Rio Tinto PLC, RIO-N a British-based mining and metals company, has the largest market cap on our list at US$117.4-billion. The stock also has the highest TC Quantamental Rating on our list at 8.2, which is very strong and above average for the basic materials sector. U.S. equities with a TC Quantamental Rating of 7 or higher produced a 17.5-per-cent annualized return using a five-year historical period with monthly rebalancing, compared with 8 per cent for the S&P 500 index, according to our research.
Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described outperformed the benchmark with a 12-per-cent total return compared with 8 per cent for the S&P 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
Gary Christie