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What are we looking for?

Companies in defensive sectors with manageable debt, high-quality earnings and reasonable valuations.

The screen

U.S. stock markets have continued to hit record highs this month despite uncertainties across the global economy. The world’s three largest economies are facing: an election whose likely potential winners have wildly different economic plans (the United States); a coronavirus that is a severe threat to economic growth (China); and a growth forecast less than 1 per cent for 2020 (the European Union).

For investors getting nervous about what might feel like lofty valuations built on shaky foundations, we will look to the three sectors identified as “defensive” by Fidelity Investments: health care, consumer staples and utilities. Within these sectors we will look for names that have manageable debt and are unlikely to default, top-quality earnings and valuations that are reasonable.

Story continues below advertisement

  • For creditworthiness, we use the Refinitiv StarMine Credit Model, which looks at: structural components such as leverage and asset volatility, credit ratios such interest coverage and liquidity, and a text-mining model that uses artificial intelligence and natural language processing to scrape transcripts, news, filings and research.
  • For earnings, we use the StarMine Earnings Quality Model, which considers: accruals, cash flows and operating efficiency.
  • For valuations, we use both the StarMine Relative Valuation Model – looking at multiple ratios relative to peers – and Intrinsic Valuation Model, which looks at current price in the context of projected cash flows.
  • For each of these models we require a score of 70, meaning above 70th percentile relative to regional peers (in this case Canada and the United States). For context, a credit model score of 70 corresponds to a probability of less than six in 10,000 that the company defaults within the next 12 months.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv’s environmental, social and governance (ESG) data cover more than 70 per cent of the world’s public companies by market capitalization, using more than 400 metrics.

What we found

The universe for the screen comprised companies that trade in the U.S. and Canada, although none from Canada made the list. Two of the companies that passed the screen, Jazz Pharmaceuticals PLC and Global Cord Blood Corp., are U.S.-listed but headquartered overseas – Hong Kong and Ireland, respectively.

Of the five companies that pass the screen, four are health care-related companies; outlier Universal Corp., ironically, is a tobacco company. The largest company of the group is Alexion Pharmaceuticals Inc. Geoff Meacham of Bank of America, the top (most accurate) analyst on Alexion according to StarMine Analyst Rankings, made a note maintaining his strong buy rating and US$130 price target after hosting a conference call with Alexion management on Feb. 7.

Investors are advised to do their own research before trading in any of the securities shown.

Select stocks in defensive sectors

CompanyTickerHeadquartersGICS Sub-IndustryMkt. Cap. (US$ Mil.)Credit ModelProbability of Default (%)Earnings Quality ModelRelative Valuation ModelIntrinsic Valuation Model1Y Rtn. (%)Div. Yld. (%)Recent Close (US$)
Alexion PharmaceuticalsALXN-QUSABiotechnology22,707720.053907782-20.8n/a102.56
Jazz PharmaceuticalsJAZZ-QIrelandPharmaceuticals7,968700.05588848911.8n/a140.85
Universal Corp.UVV-NUSATobacco1,245810.043758091-7.26.050.47
Global Cord Blood Corp.CO-NHong KongHealth Care Services588700.055998081-27.21.74.84
Fonar Corp.FONR-QUSAHealth Care Equipment138720.053907990-9.9n/a20.27

Hugh Smith, CFA, MBA, is director of Refinitiv’s ESG and investment management business for the Americas, and a director on the board of the Responsible Investment Association.

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