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for 24 weeks
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What are we looking for?

U.S.-listed stocks that are out of the spotlight and steadily increasing their earnings and revenue.

The screen

Recall that after the sell-off in March last year, it only took the S&P 500 Total Return Index 120 trading days to recover to its prepandemic highs – a feat driven by top-heavy index constituents such as Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc. and Alphabet Inc., which together make up roughly one-quarter of the index. Although these superstars have been able to produce outsized returns for investors, one can’t help but wonder if we aren’t missing other names that aren’t so directly in the spotlight. To this end, today I look for U.S.-listed stocks that are not part of the S&P 500 but have also exhibited desirable fundamental growth characteristics. To do this, I ranked the 1,554 companies that are in the CPMS U.S. database, but not in the S&P 500, on the following measures:

  • Three-year revenue and earnings growth (how much, on average, top and bottom lines have grown in each of the past three years);
  • Three-year average return on equity (a profitability metric, higher figures preferred);
  • Three-year earnings per share deviation (a measure of how consistent earnings have been over the past three years, lower figures preferred).

Only companies with a market cap greater than the bottom one-third of the universe were considered (today this figure is US$1.1-billion). Additionally, to screen out companies that appear overleveraged relative to peers, I looked for companies with a sector-relative debt-to-equity ratio of less than or equal to one (in the table, a sector-relative D/E of 0.7 would imply that the company is 30 per cent less leveraged than the median of the sector to which it belongs).

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What we found

I used Morningstar CPMS to back-test this strategy from April, 2004, to February, 2021, using a maximum of 15 stocks with no more than three for every economic sector. Once a month, stocks were sold if they fell below the top 25 per cent of the index based on the aforementioned metrics. When sold, they were replaced with the highest ranked qualifying stock not already held in the portfolio. Over this period, the strategy produced an annualized total return of 13.2 per cent, while the S&P MidCap 400 Total Return Index advanced 8.8 per cent on the same basis.

The stocks that meet the requirements to be purchased today are listed in the accompanying table. This article does not constitute financial advice. It is always recommended to speak with a financial adviser or professional before investing.

Select U.S.-listed stocks that are not part of the S&P 500 

RankCompanyTickerMorningstar SectorMkt. Cap. (US$ Mil.)3Y Avg. Sales Grth. (%)3Y Avg. EPS Grth. (%)3Y Avg. ROE (%)3Y EPS Dev. (%)Sector Rel. D/EDiv. Yld. (%)1Y Ttl. Rtn. (%)*Recent Price (US$)
1Medifast Inc.MED-NCons. cyclical2,515.646.554.258.56.80.02.7249.5213.65
2Manhattan AssociatesMANH-QTechnology7,487.24.82.872.02.80.30.0135.5117.35
3Crocs Inc.CROX-QCons. cyclical5,084.09.0136.356.718.20.90.0357.377.69
4TopBuildBLD-NIndustrials6,980.716.134.715.63.10.90.0194.7211.1
5Taylor Morrison HomeTMHC-NCons. cyclical4,005.318.020.913.63.30.70.0182.631.09
6Axos Financial Inc.AX-NFin'l services2,816.216.513.317.13.30.50.0162.947.67
7Insight EnterprisesNSIT-QTechnology3,329.58.321.617.32.70.70.0125.194.85
8Maximus Inc.MMS-NIndustrials5,465.618.33.820.34.30.11.354.788.94
9Emcor Group IncEME-NIndustrials6,186.510.215.616.73.10.40.584.7112.9
10First Fin'l BancsharesFFIN-QFin'l services6,743.69.215.814.03.00.01.178.547.4
11Nat'l Health InvestorsNHI-NReal estate3,312.63.80.711.61.01.06.156.172.87
12Balchem Corp.BCPC-QBasic materials4,100.33.58.814.32.10.30.528.8126.58
13TechTarget Inc.TTGT-QCommun. svcs.1,911.68.281.214.18.60.90.0229.667.94
14ePlus Inc.PLUS-QTechnology1,343.97.422.116.74.10.00.058.999.52
15Prosperity BancsharesPB-NFin'l services7,077.54.411.68.21.70.02.661.876.16

Source: Morningstar CPMS, data as of March 30. *Total return from month end, 12 months ago 

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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