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What are we looking for?

Stocks have been having a strong rally since the start of 2019 and the market has recovered most of December’s losses. When the entire market is performing well, it may become confusing for investors to identify real value and understand which stocks are actually backed up by solid company fundamentals. We carried out a screener two weeks ago addressing this matter in the Canadian market and today we run a similar screen for S&P 500 companies.

The screen

We screened the S&P 500 by focusing on the following criteria:

  • Market capitalization of more than US$10-billion;
  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a greater pace than the cost 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;
  • Economic performance index (EPI) of more than one and a positive EPI 12-month change. This is a key criterion as it represents the ratio of return on capital to cost of capital. An EPI of more than one indicates that the company is generating wealth for shareholders – for every dollar invested into the company, more than one dollar is generated in returns;
  • Free-cash-flow-to-capital ratio greater than 5 per cent. This ratio gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent.
  • Future-growth-value-to-market-value (FGV/MV) between 40 per cent and minus 70 per cent. 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 (as of last month’s end). Please note that some ratios may be reported at the end of the previous quarter.

More about Inovestor

Inovestor for Advisors is a research platform based on fundamental analysis specializing in the economic value-added (EVA) method. It helps advisers quickly identify attractive investment opportunities and easily communicate them to their clients through client-friendly reports. In addition, Inovestor allows investors to create personalized screeners, track custom portfolios and obtain in-depth analysis on more than 13,000 companies.

What we found

We came up with a solid list of 15 companies made up mostly of companies within the industrials sector.

The top industrial company, ranked in descending one-year returns, is Union Pacific Corp., one of the world’s largest transportation companies focused on railway operation. Union Pacific is positioned competitively as it is generating the highest wealth for the least amount of risk (deduced from the FGV/MV metric of 0.8 per cent and EPI of 3.3), and solid EPI growth of 1.9.

Microchip Technology Inc., which develops and manufactures specialized semiconductor products, is an information-technology company that stands out. Microchip Technology had an FCF/capital of 10.6 per cent, from which its dividend, with a yield of 2 per cent, is paid and growth opportunities pursued. During the past 12 months, the stock price has declined by 16.8 per cent; however, economic profit has more than doubled (seen in the EVA change rate of 141.2 per cent).

Readers are advised to conduct further research before investing in any of the securities shown here.

Select S&P 500 companies

Company Ticker Recent Price (US$) Market Cap. (US$M) FCF / Capital (%) EPI EPI 12M Chg. FGV on MV (%) Div. Yield (%) 1Yr Price Return (%) EVA 12M Chg. (%)
Church & Dwight Co. Inc. CHD-N 63.34                                       15,619.6  14.3 4.0 2.1 33.5 1.3 29.5 198.3
Union Pacific Corp. UNP-N 161.72                                     117,256.2  11.5 3.3 1.9 0.8 2.2 19.9 392.9
CSX Corp. CSX-Q 68.75                                       56,249.9  10.3 2.5 1.6 12.0 1.4 14.3 477.8
Republic Services Inc. RSG-N 76.68                                       24,729.3  5.9 1.3 0.4 28.4 2.0 10.0 133.4
Norfolk Southern Corp. NSC-N 171.46                                       45,968.2  6.4 2.4 1.6 -2.0 2.0 9.4 518.2
Verizon Communications Inc. VZ-N 53.95                                     222,921.4  6.6 2.9 1.3 -63.3 4.2 3.1 628.5
Walt Disney Co. DIS-N 111.51                                     167,265.0  7.8 1.5 0.3 39.5 1.5 -1.0 53.5
Sherwin-Williams Co. SHW-N 421.01                                       38,987.3  5.5 3.5 1.0 39.8 0.9 -7.3 168.9
Southwest Airlines Co. LUV-N 57.65                                       31,857.6  16.4 2.4 0.8 5.6 1.3 -9.6 205.4
Comcast Corp. CMCSA-Q 37.6                                     170,176.2  9.2 2.7 1.5 -42.5 2.2 -16.4 456.2
Microchip Technology Inc. MCHP-Q 87.41                                       20,712.9  10.6 2.1 0.4 28.8 2.0 -16.8 141.2
Lam Research Corp. LRCX-Q 175.3                                       26,989.4  18.5 1.5 0.5 39.6 2.8 -18.3 122.7
Paccar Inc. PCAR-Q 65.95                                       22,858.3  5.9 1.5 0.4 32.4 2.0 -20.4 125.4
Dover Corp. DOV-N 86.82                                       12,676.3  6.7 1.4 0.3 25.6 2.7 -24.3 164.5
Applied Materials Inc. AMAT-Q 39.78                                       38,467.3  15.2 2.1 0.4 30.8 2.1 -31.4 361.9

Source: Inovestor for Advisors 

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