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What are we looking for?

In times of excessive volatility, an investor’s thoughts quite naturally turn to sector selection, and one sector that has shown defensive and independent qualities toward economic cycles is consumer staples. Today, we screen for specific companies within that sector that have demonstrated economic stability.

The screen

We screened the large-cap U.S. consumer-staples universe of stocks using the following criteria:

  • A market capitalization of US$10-billion or more;
  • A return on capital greater than 10 per cent;
  • An economic performance index (EPI) of at least one. The EPI is the ratio of return on capital to cost of capital. An EPI ratio of one or more indicates a company is creating wealth for its shareholders;
  • An EPI change greater than or equal to zero over 12 months and 24 months;
  • A positive sales variation over 12 months and 24 months;
  • Free-cash-flow-to-capital ratio. This ratio gives us an idea of how efficient the company converts its invested capital to free cash flows, which is the amount left after all capital expenditures have been accounted for. It is an important measure as it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are looking for a positive ratio.

For informational purposes, we also include dividend yield, recent share price, one-year price return and future-growth-value-to-market-value (FGV/MV) ratio. Note that FGV/MV 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.

More about Inovestor

Inovestor for Advisors is a research platform application based on the economic profit approach. It aids advisers in quickly identifying attractive investment opportunities and easily communicating them to their clients. In addition to providing detailed reports on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts), Inovestor allows investors to create personalized filters and build custom portfolios.

What we found

With the exception of CVS Health Corp., all the companies that surfaced in our screen are trading at a premium, as indicated by positive FGV/MV ratios. Estée Lauder Companies Inc., a global manufacturer and marketer of beauty products, has had an impressive fiscal year so far because of several factors, growing online sales among them. The company exhibits the highest FCF/capital ratio and the highest 12-month price growth compared with the other companies on our list, while maintaining steady growth in shareholder value creation as measured by its EPI.

Select consumer staples stocks

CompanyTickerMkt. Cap (US$ Mil.)FGV on MVR/C (%)Sales Chg. 12MSales Chg. 24MFCF/CapitalEPIEPI Chg. 12MEPI Chg. 24MRecent price (US$)12M ReturnDiv. Yield
Philip Morris Int'lPM-N127,26443.1%19.310.80%12.99%3.3%3.05.30%1.70%81.87-26.0%4.28%
CVS Health Corp.CVS-N64,110-28.6%12.13.98%16.09%3.6%1.69.00%28.90%63.10-15.3%3.21%
Estee Lauder Cos. Inc.EL-N49,85768.9%13.714.70%19.20%11.6%1.98.57%17.30%135.7469.9%0.96%
Constellation Brands Inc.STZ-N41,81643.2%16.13.49%15.90%5.0%2.015.60%68.07%221.2835.1%0.97%
Kimberly-Clark Corp.KMB-N36,26433.2%13.11.64%0.70%5.9%2.02.60%5.91%103.73-20.2%3.55%
Sysco Corp.SYY-N32,47935.2%12.47.41%16.66%8.4%1.70.00%46.22%62.2918.3%2.22%
McCormick & Co. Inc.MKC-N13,54648.5%11.913.60%16.48%3.8%2.12.99%20.35%103.205.5%1.81%
Church & Dwight Co. Inc.CHD-N11,57734.8%18.310.90%13.80%9.1%2.66.97%4.40%47.35-6.7%1.56%
Group average(8/34)47,11434.8%14.68.31%13.98%6.3%2.16.38%24.11%102.327.6%2.32%

Source: Inovestor

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

Noor Hussain is an account executive for Inovestor Inc.