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Number Cruncher Seeking wealth creators among U.S. consumer discretionary stocks

What are we looking for?

Today we focus on U.S. companies in the consumer discretionary sector. We are looking for wealth creators and comparing them with the premium or discount the market has attributed to them.

The screen

We screened the S&P 500 Consumer Discretionary stock universe by focusing on the following criteria:

  • Market capitalization above US$10-billion;
  • A current economic performance index (EPI) equal to or greater than one – this ratio is the return on capital to cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent;
  • A positive 12-month EPI change – this measures the growth in return on capital versus cost of capital over the past 12 months;
  • A future-growth-value-to-market-value ratio (FGV/MV) between 50 per cent and minus 50 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount as that would increase the risk. This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk.

We have also included recent stock price, dividend yield and one-year return. Please note that some ratios may be reported at the end of the 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

Topping our list, based on market cap, we have McDonald’s Corp. A few days ago, McDonald’s released its second-quarter figures with earnings and sales higher than expected, pushing the stock price to new highs. The company is operating efficiently and has no problem covering its cost of capital; this can be seen by an EPI of 2.9. Also note the optimism in the market toward this stock, based on the 45-per-cent premium priced into the stock price.

Yum Brands Inc. is another fast-food-related company on our list. The company is one of the strongest performers in terms of 12-month stock price growth, at 44.4 per cent. Also, the EPI is seven, which is quite high and has increased steeply over the 12-month period. According to this, the performance is great, but a premium of 35.6 per cent is baked into the stock price. Second-quarter earnings are scheduled to come out later this week.

Discovery Inc., a media company and television network operator, is one of only two on our list (the other being General Motors Co.) that is trading at a discount. With an EPI of 1.6 that has grown by 51.5 per cent over the past year, and a one-year return of 19.9 per cent, Discovery is positioned competitively and is still undervalued (as shown by its negative FGV of minus 43.8 per cent).

Investors are advised to do further research before investing in any of the companies that are listed here.

U.S. consumer discretionary stocks

CompanyTickerMkt. Cap. (US$ Mil.)EPIEPI Chg. 12M (%)FGV on MV (%)Div. Yld. (%)1Y Rtn. (%)Recent Price (US$)
McDonald's Corp.MCD-N164,595.32.973.445.02.338.1215.58
Booking Holdings Inc.BKNG-Q86,907.32.194.047.90.0-5.61,966.85
TJX Companies IncTJX-N67,618.33.018.841.11.514.455.76
General Motors Co.GM-N57,078.01.4104.8-7.94.110.940.77
Marriott InternationalMAR-Q46,864.21.656.345.91.37.1140.27
Target Corp.TGT-N44,601.91.611.515.43.39.087.06
Activision Blizzard Inc.ATVI-Q36,756.71.744.48.40.738.247.99
Dollar General Corp.DG-N35,640.81.931.136.60.939.1137.97
Yum Brands Inc.YUM-Q34,890.17.0337.035.61.544.4114.02
eBay Inc.EBAY-Q34,715.71.0129.745.90.719.841.23
O'Reilly Automotive Inc.ORLY-Q29,432.93.969.841.60.026.4383.79
AutoZone Inc.AZO-N28,208.63.4109.936.10.061.21,146.18
Royal Caribbean CruisesRCL-N23,876.71.28.823.32.32.2113.96
Best Buy Co. Inc.BBY-N20,759.31.969.019.72.52.377.75
Omnicom Group Inc.OMC-N17,769.51.128.731.03.118.781.69
D.R. Horton Inc.DHI-N16,604.41.16.826.41.31.544.50
Discovery Inc. DISCA-Q16,553.21.651.5-43.80.019.931.47
Genuine Parts Co.GPC-N14,302.51.639.019.82.90.397.91

Inovestor for Advisors

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

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