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What are we looking for?

The unresolved and further complication of the Sino-U.S. trade dispute hit the markets once again last week, which I believe will cause higher volatility in the markets in the short run. On Friday, U.S. President Donald Trump confirmed that, for now, no business will be made with Chinese telecom giant, Huawei, and that he is not ready to finalize a trade deal with China. This follows China’s decision to stop purchasing American agricultural products. Therefore, today we want to screen the U.S. market to identify companies with low volatility and sustainable operations that can withstand further potential market turmoil.

The screen

This strategy uses the Inovestor for Advisors platform to screen the S&P 500 using the following criteria:

  • A market capitalization of US$10-billion or more;
  • A beta of one or less. A stock with a beta less than one is considered less volatile than the market;
  • A five-year average return on capital (ROC) greater than or equal to 10 per cent, reported as of last quarter’s end, and a positive change in the 12-month return on capital figure;
  • A minimum free-cash-flow-to-capital ratio of 5 per cent. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to do such things as stimulate growth, distribute or increase dividends, or reduce debt;
  • A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • A cost of capital less than 10 per cent, reported as of last quarter’s end.

For informational purposes, we have also included recent stock price, dividend yield, and one-year return. Please note that some ratios may be reported at end-of-previous quarter.

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More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

What we found

AbbVie Inc., one of the world’s largest biopharmaceutical companies, is the highest dividend paying stock on our list with a yield of 5.7 per cent. AbbVie, whose majority of sales come from one single drug, Humira, has been strategizing to diversify either organically or through acquisitions. AbbVie moves proportionally with the broader market given by a close to 1 beta. Furthermore, return on capital is a healthy 17.4 per cent and operations are generating an excellent free cash flows to capital ratio of 6.7 per cent.

Another interesting finding is Sysco Corp., a food products and accessories distributor. Sysco Corp. has more defensive features by firstly being part of the consumer staples sector, and second by having a beta of 0.5. Sysco Corp. had a flat return over the past 12 months and is paying out a dividend yield of 2.2 per cent. Sysco Corp. is expected to report fourth quarter earnings this week.

Select low volatility S&P 500 stocks

NameTickerMarket Cap. (US$Mil)Beta5Yr Avg. ROC (%)ROC 12M Chg. (%)FCF/Capital Avg. (%)EVA 12M Chg. (%)Cost of Capital (%)Div. Yield (%)1Yr Return (%)Recent Price (US$)
Intel Corp.INTC-Q 203,691 0.813.84.15.9278.18.42.6-8.345.98
Abbvie Inc.ABBV-N 96,952 1.017.44.86.7159.98.05.7-31.365.58
Estee Lauder Cos.EL-N 66,425 0.714.92.310.535.38.21.038.9183.61
TJX Cos. Inc.TJX-N 64,223 0.621.10.611.514.87.41.56.152.96
Colgate-Palmolive Co.CL-N 61,365 0.816.60.66.412.18.22.48.571.52
HCA Healthcare Inc.HCA-N 43,543 0.812.94.26.9216.36.81.1-0.5127.5
Target Corp.TGT-N 42,220 0.711.10.56.87.77.13.3-0.382.41
Ross Stores Inc.ROST-Q 38,535 0.924.20.317.328.78.81.014.5105.5
Sysco Corp.SYY-N 35,964 0.512.72.35.070.86.92.2-0.169.99
Brown-Forman Corp.BF-B-N 26,421 0.719.70.611.936.28.01.23.255.37
L3Harris Technologies IncLHX-N 25,033 1.013.02.09.459.88.71.411.9211.61
ResMed Inc.RMD-N 18,847 0.513.86.413.5118.17.01.221.6131.4
Best Buy Co.BBY-N 17,985 0.910.75.27.4333.18.32.5-14.467.36
Broadridge FinancialBR-N 14,373 0.716.30.916.639.28.11.5-3.1125.75
Genuine Parts Co.GPC-N 13,356 1.013.31.85.769.28.22.9-8.091.43
Expeditors InternationalEXPD-Q 12,292 0.921.02.116.031.99.31.3-1.372.29
C.H. Robinson Worldwide Inc.CHRW-Q 11,467 0.621.41.612.541.27.72.3-10.884.48
Rollins Inc.ROL-N 10,784 0.424.70.48.810.96.71.1-11.832.93

Source: Inovestor for Advisors

Readers are advised to conduct further research before investing in any of the securities shown here.

Noor Hussain is an analyst and account executive for Inovestor Inc.

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