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What are we looking for?

Lesser-known U.S. names showing long-term stability and quality.

The screen

For Canadian domiciled equity investors, investing in U.S. equities can often lead to a large-cap bias. Naturally, investors may often gravitate toward companies that have a recognizable brand that affects their daily lives. This being said, it is important to highlight just how large the U.S. equity market is, and the opportunities for growth in your investment portfolio.

Case in point, the median market cap stock in the U.S. market currently sits at US$3.2-billion (or roughly $4.2-billion Canadian). By contrast, the median stock in Canada has a market cap of $440-million, or a little more than one-tenth the comparable U.S. figure.

It can prove fruitful to look past the more familiar names listed in the S&P 500, an index focused on large cap stocks. Today, I use Morningstar CPMS to rank all the stocks in our U.S. database on the following metrics:

  • 10-year dividend growth rate (on average, how much dividends have grown each year in the past 10 years);
  • 10-year average return on equity;
  • Deviation of earnings over the past 10 years and deviation of total returns over the past five years (these statistical measures outline the stability of a company’s reported earnings and stock price, respectively, lower values preferred);
  • Variation of earnings per share estimates (measuring the consistency of analyst opinion, lower values preferred).

To qualify, companies must not be part of the S&P 500 index and must have a market capitalization greater than US$1.1-billion (this figure is meant to exclude the bottom one-third of U.S.-listed companies by market cap).

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back test this strategy from February, 2006, to August, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than three for every economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the universe, if the company reported negative return on equity or if analyst estimates on EPS fell by more than 10 per cent over three months. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 12.9 per cent, while the S&P 600 SmallCap Index registered a total return of 6.8 per cent.

The stocks that qualify for purchase today are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.

Select U.S.-listed stocks that are outside the S&P 500

RankCompanySymbolMkt. Cap. (US$ Mil.)10Y Div. Grwth. Rate (%/Y)10Y Avg. ROE (%)10Y EPS Dev.5Y Dev. of Rtns. Var. of EPS Estim. (%)Trailing ROE (%)3M EPS Est. Rev. (%)Div. Yld. (%)Recent Close (US$)Price Chg. From Month End, 12M Ago (%)
1Herman Miller Inc.MLHR-Q2,677.236.435.98.627.31.225.82.41.945.3320.1
2Maximus Inc.MMS-N4,963.256.522.58.226.71.420.52.11.377.7821.1
3Wyndham Destin. *WYND-N4,189.820.81,359.110.926.23.352,293.03.64.045.438.8
4Brinker Int'l Inc. *EAT-N1,577.615.112,677.67.229.52.239,775.03.73.642.07-6.7
5Nic Inc.EGOV-Q1,384.717.033.06.932.30.724.92.51.520.6841.9
6Dicks Sporting GoodsDKS-N3,488.660.517.68.636.61.316.73.02.838.611.8
7J&J Snack FoodsJJSF-Q3,608.426.512.44.621.33.712.00.01.0191.5228.3
8Deluxe Corp.DLX-N1,983.02.753.62.824.818.828.91.52.646.19-16.8
9Hubbell Inc.HUBB-N7,213.511.518.66.722.01.123.80.92.5132.581.8
10Eaton Vance Corp.EV-N5,059.49.341.710.925.02.035.50.33.144.59-12.5
11CSG Systems Int'l Inc.CSGS-Q1,700.227.424.610.126.72.928.92.61.751.5130.5
12Natl Health InvestorsNHI-N3,607.67.213.42.618.47.411.40.05.083.214.2
13Scotts Miracle-GroSMG-N5,615.212.732.516.422.84.050.13.62.3101.1831.3
14Brown & Brown Inc.BRO-N10,114.69.611.28.715.83.112.71.90.935.9622.7
15National Retail Prop.NNN-N9,151.93.46.27.119.40.67.13.03.755.9729.4

Source: Morningstar CPMS 

*Note that WYND and EAT both have very high ROE figures because of a low or negative book value of equity. These extreme values were accounted for in the analysis. 

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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