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What are we looking for?

U.S. blue-chip stocks isolated from the NAFTA negotiation outcome.

The screen

In the wake of Washington’s proposed trade deal with Mexico, North American free-trade agreement negotiations between the United States and Canada drag on, with the two sides apparently in deadlock over a few key issues. It can be argued that walking away from the deal would hurt both countries. However, unfortunately for Canada, the effects of a “no deal” might be far worse for us than the United States. A recent study by the Bank for International Settlements found that if NAFTA were dissolved, the Canadian economy would shrink by 2.2 per cent, compared with only 0.2 per cent for the United States (and 1.8 per cent for Mexico). The U.S. economy is strong, with by far the highest forecast GDP growth among the Group of Seven countries in each of the next three years. With a strong economy, and less exposure to the headwinds of a potentially dissolved NAFTA, Canadian investors might consider trimming exposure to Canada and moving capital south of the border.

We are currently in the longest bull run for American shares ever, so we will limit our search to four defensive sectors – consumer staples, health care, telecom and utilities – that perform relatively better at the end of a cycle. We also require a market cap of at least US$30-billion to further limit downside risk.

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Among these defensive sectors, we are aiming to find companies that don’t rely heavily on NAFTA (or wouldn’t suffer greatly if it went away). To do this, we use the revenue component of the Thomson Reuters StarMine Countries of Risk model. The revenue component provides the relative revenue distribution to each individual country in which a company does business. We require at least 85 per cent revenue exposure to the United States and no more than 2 per cent to either Canada or Mexico.

Finally, we use the Thomson Reuters Combined Alpha Model, which considers momentum, valuations (relative and intrinsic), buy side sentiment, analyst sentiment, short interest, insider transactions and earnings quality. We require a score of at least 90, or in the top 10 percentile relative to its U.S. peers.

More about Thomson Reuters

Thomson Reuters delivers trusted news and intelligent information to over one billion people in 140 countries every day. Our content, soft ware and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.

What we found

The screen yields five companies, ranked in the table by dividend yield. The two paying the highest yields – Keurig Dr. Pepper Inc. and AT&T Inc. – will probably also be the most familiar to readers.

Keurig Dr. Pepper is the product of a merger earlier this summer between Dr. Pepper Snapple and Keurig Green Mountain’s coffee business. The combined entity now has a very impressive stable of brands (including Canada Dry), and beyond its healthy dividend is very attractively valued at only 6.5 times forward cash flow (next 12 months) compared with 18.5 times for the beverage industry as a whole. Furthermore, company officers or directors who are considered insiders appear to be very bullish about the company’s prospects postmerger. Over the past two years, 28 of them have been net buyers of the stock while only one has been a net seller. Over the past month alone, there has been net buying of US$3.7-million in insider transactions.

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Investors are strongly advised to do further research before investing in any of the securities shown below.

U.S. large caps less exposed to NAFTA-related headwinds

Relative Revenue Exposure
Company Ticker Sector Market Cap (US$Mil) USA Canada Mexico Combined Alpha Model Div. Yield (LTM) 1Yr Return
Keurig Dr Pepper Inc. KDP-N Consumer Staples $32,080 89% 0.291% 0.203% 96 7.5% 58.5%
AT&T Inc. T-N Telecom $235,216 93% n/a 1.814% 94 6.1% -4.2%
HCA Healthcare Inc. HCA-N Health Care $45,505 96% n/a n/a 96 0.5% 69.4%
Cigna Corp. CI-N Health Care $45,353 87% 0.144% 0.100% 94 0.0% 0.0%
Express Scripts Holding ESRX-Q Health Care $50,675 100% 0.003% 0.002% 92 0.0% 41.6%

Source: Thomson Reuters Eikon

Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.

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