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Number Cruncher Fifteen U.S. stocks to play defensively amid the latest market volatility

What are we looking for?

Last Friday, the U.S. yield curve inverted, causing some panic in the stock market. On Monday, the curve stabilized but still remained inverted, prompting caution from investors. An inversion, resulting from uncertain economic growth, is often seen as a leading indicator of recession. In order to protect themselves, investors may choose to re-allocate some of their assets to non-cyclical sectors, which act defensively during market volatility. Today we look into two of them: utilities and telecommunications.

The screen

We screened the U.S. universe by focusing on the following criteria:

  • Market capitalization greater than US$10-billion;
  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • Positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is the return on capital to cost of capital;
  • Future-growth-value-to-market-value ratio (FGV/MV) is between 40 per cent and minus 70 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount because 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.

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

Verizon Communications Inc., an industry leader in U.S. telecommunications, is the largest company by market cap in our list. Verizon’s company fundamentals are well-rounded, making it a reliable pick. This is given by a high current EPI ratio of 2.9 and a sharp rise in the ratio over the past 12 months. Not only are the added-value qualities attractive, the stock price gained 19.2 per cent over the past 12 months but is still trading at a 53.5-per-cent discount, according to the FGV/MV metric.

Exelon Corp., a U.S. energy company providing power generation, energy sales, transmission and delivery, is also trading below its fair value, by 38.1 per cent. Exelon is a quality company as shown by its significantly rising EVA and EPI multiples, but still possesses growth characteristics despite a 31.2-per-cent one-year price return.

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

Select U.S. stocks from two non-cyclical sectors 

CompanyTickerSectorPrice (US$)Market Cap (US$Mil)EPIEPI 12M Chg (%)FGV/MV (%)EVA 12M Chg (%)1Yr Return (%)Div. Yield (%)
Verizon Communications Inc.VZ-NTelecom. Svcs59.76 246,930.3 2.85130.2-53.5422.119.24.2
NextEra Energy Inc.NEE-NUtilities193.93 92,698.5 2.0998.5-5.4249.223.42.6
Duke Energy Corp.DUK-NUtilities90.7 65,938.9 1.014.30.215.919.04.2
T-Mobile US Inc.TMUS-QTelecom. Svcs71.9 61,128.0 1.7665.5-16.3297.519.10.0
Dominion Energy Inc.D-NUtilities75.52 51,429.1 1.3218.6-0.759.90.04.7
Exelon Corp.EXC-NUtilities50.28 48,671.0 1.4139.9-38.1156.331.23.1
American Electric Power Co.AEP-NUtilities85.14 41,995.0 1.264.96.41.123.73.4
Public Service Enterprise PEG-NUtilities59.63 30,053.5 1.2047.018.9126.821.43.5
Consolidated Edison Inc.ED-NUtilities84.91 27,256.1 1.2713.78.339.910.13.7
WEC Energy Group Inc.WEC-NUtilities79.33 25,030.5 1.5427.10.581.827.33.2
Eversource EnergyES-NUtilities71.69 22,717.5 1.2311.816.230.822.53.1
CenterPoint Energy Inc.CNP-NUtilities30.72 15,396.8 2.08122.8-59.2454.611.43.9
Atmos Energy Corp.ATO-NUtilities102.81 12,017.8 1.5422.520.336.722.82.1
Alliant Energy Corp.LNT-NUtilities47.55 11,206.5 1.1615.628.310.018.73.2
Pinnacle West Capital Corp.PNW-NUtilities96.72 10,842.5 1.4129.72.264.821.83.3

Source: Inovestor for Advisors

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

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