What are we looking for?
Potentially resilient stocks available at deep discounts.
On Feb. 19, the S&P 500 crossed higher than 3393 – a record high. It has since lost 30 per cent as of Monday’s close, and the TSX 60 and TSX Composite have fared even worse. This might seem like a frightening time to be in the market for shares, but for those brave enough, we will look for once-loved stocks that can be had for a deep discount.
We start with a universe of all companies trading in North America whose shares have fallen by more than the 30-per-cent drop experienced by the broad market indexes. Among this group, consider the long-term component of the Refinitiv Price Momentum Model. The long-term component compares the average closing price over the past six months to the average closing price of the past 12 months, and we screen for companies in the top 20 per cent of their sector.
Next, we take heed of the markets’ worry about a cash crunch and rising defaults, and use Refinitiv’s Credit Model to assess their creditworthiness. Ratings agencies are notoriously slow to react to even normal developments, so their credit ratings are especially unlikely to be relevant in today’s volatile market. Refinitiv’s quantitative credit model is updated daily to reflect current market conditions and sentiment, and we screen for at least an A-minus credit rating, implied by the model.
Finally, we look at whether the reported earnings that led to the strong share-price momentum for the companies were of high quality or, in other words, sustainable. We use the Refinitiv Earnings Quality Model, which considers accruals, cash flows, operational efficiency and the company’s use of exclusions, and screen for those in the top 15 per cent of North America (a score of 86 to 100).
More about Refinitiv
Refinitiv, formerly the Financial & 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 in more than 190 countries. Refinitiv’s ESG data cover more than 70 per cent of global market cap on more than 400 metrics.
What we found
The six companies passing the screen have a six-month average closing price 16 per cent higher than the 12-month average, even after the recent 30-plus-per-cent drawdown. Interestingly, three of the six are Israeli companies that trade on the Nasdaq. The largest of these, machinery manufacturer Kornit Digital Ltd., has the highest model-implied credit rating of the group. It also has no manufacturing operations in, and little revenue exposure to, China – whose economy has been hit particularly hard by the drastic measures taken to limit the spread of the novel coronavirus.
The largest U.S. company on the list is semiconductor maker Nvidia Corp. After a recent conference call that discussed the impact of the coronavirus, Wells Fargo reiterated its view on Nvidia as a “top pick.” Nvidia said it has seen some effects on retail demand in Asia-Pacific, but this has been somewhat offset by e-commerce demand.
Investors are advised to do their own research before trading in any of the securities shown.
Hugh Smith, CFA, MBA, is an investment management specialist at Refinitiv.