Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

What are we looking for?

U.S. large and mid-cap value stocks.

The screen

Value stocks tend to be some of the best performers after a market correction. Value stocks, or stocks that are currently trading below their expected worth, tend to get hit hard during periods of volatility. Afterward, however, they can be an excellent place to look for ideas as their recovery tends to be strong.

Today I’m going to repeat my study from last month, which looked for Canadian value stocks, this time with the focus on the U.S.-listed shares. This strategy will search for value stocks within the CPMS U.S. universe, which today comprises 2,090 companies. This strategy ranks stocks using the following factors:

Story continues below advertisement

  • Price-to-trailing-earnings, measured as the company’s most recent share price divided by the previous four quarters’ earnings per share, low values preferred;
  • Trailing free cash flow, a profitability metric – the latest four quarters’ free cash flow per share, high values preferred;
  • Price-to-trailing-cash-flow, measured as the company’s most recent share price divided by the trailing four quarters of cash flow per share, low values preferred;
  • Price to book value – measured as the company’s most recent share price divided by the company’s adjusted book value, low values preferred;

In order to qualify, stocks must have a trailing P/E in the bottom half of all U.S. stocks (that value today is 20.99 or below). To ensure companies are not overleveraged, they must have a debt/equity ratio of no more than 1.1. Stocks must also have a positive trailing free cash flow, as well as a trailing return on equity (a profitability metric) in the top third of peers, which today equates to a value of 16.76 per cent or higher. Lastly, stocks must also have a market capitalization in the top third of peers (that value today is roughly US$5.6-billion or higher).

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.

What we found

I used Morningstar CPMS to back test this strategy from April, 2004, to April, 2020. During this process, a maximum of 15 stocks were purchased. No more than three stocks could be held in any one sector at any given time. Stocks were sold if the company’s debt-to-equity ratio grew to more than 1.3 or if the trailing P/E rose into the highest third of peers. 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 10.6 per cent while the S&P 500 Index returned 8.5 per cent on the same basis.

Stocks that qualify for purchase into the strategy today are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Select U.S.-listed large and mid-cap value stocks

RankCompanyTickerMkt. Cap. (US$ Mil.)Div. Yld. (%)Trailing P/EDebt/EquityTrailing FCF (US$)Price/CFP/BTrailing ROE (%)12M Price Chg. (%)Recent Close (US$)
1Ameriprise FinancialAMP-N16,204.83.17.40.653.073.72.537.4-4.2132.46
2Lear Corp.LEA-N6,315.50.08.70.614.005.31.617.4-11.5105.40
3TD Ameritrade HoldingAMTD-Q18,429.33.69.20.424.888.12.123.2-31.534.07
4Charles Schwab Corp.SCHW-N42,265.82.212.50.316.298.81.817.4-21.132.83
5BiogenBIIB-Q49,695.50.08.50.434.057.94.148.438.9304.53
6Cummins Inc.CMI-N22,872.43.411.20.215.578.63.327.52.8155.04
7Jazz PharmaceuticalsJAZZ-Q6,151.60.06.60.610.326.82.131.6-12.7109.59
8Eastman Chemical Co.EMN-N8,895.64.08.90.99.125.81.516.90.865.46
9Snap-On Inc.SNA-N7,005.23.410.90.310.628.22.119.7-17.3128.88
10Alexion PharmaceuticalsALXN-Q22,414.00.08.90.29.229.01.923.7-10.7101.50
11NVR Inc.NVR-N11,535.10.016.50.3173.1112.44.831.1-2.13,133.86
12Carlisle Cos. IncCSL-N6,335.91.714.11.09.729.02.517.8-13.4115.38
13Expedia Group Inc.EXPE-Q10,912.20.017.10.910.707.44.317.3-32.277.95
14Plains All Amer. PipelinePAA-N7,098.57.44.11.01.613.11.017.3-56.99.75
15F5 Networks Inc.FFIV-Q8,361.70.013.90.49.7812.84.234.04.0137.31

Source: Morningstar CPMS

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies