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What are we looking for?

Looking back at May, it was the worst month so far in 2019 for the markets. The U.S.-China trade war spiralled deeper early in the month, with U.S. President Donald Trump raising tariffs on US$200-billion worth of Chinese products and China retaliating by setting tariffs on US$60-billion of American goods. Last week, the markets tumbled as the geopolitical mess worsened due to escalating trade tensions. In addition, last Thursday Mr. Trump threatened Mexico with a new wave of tariffs, which will begin on June 10. During this period of extended uncertainty, non-cyclical sectors hold up better due to their defensive characteristics. Today, we will screen U.S. health care and consumer staples stocks to identify some companies with solid operations and revenues that may be able to withstand this trade-war storm.

The screen

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

  • Market capitalization greater than US$10-billion;
  • A 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;
  • A 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;
  • A future-growth-value-to-market-value ratio (FGV/MV) of between 40 per cent and negative 70 per cent. We chose this range to eliminate stocks that trade at an exaggerated premium or discount as 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.
  • Free-cash-flow-to-capital ratio. This metric 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.

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.

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

Abbvie Inc., an American biopharmaceutical company and one of the largest independent biotech companies in the world, is known for its great yield compared to its peers of over 5 per cent. Abbvie also stands on attractive fundamentals that is given by its solid free cash flows of 11.3 per cent, its growing EVA and EPI figures, and a current EPI of 2.4 reflecting efficient coverage of the costs of capital. Regardless of its solid fundamentals, the stock has had a shaky year so far as a result of rising competition for one of its main products, Humira, but nevertheless Abbvie continues to move forward by focusing on new developments, for example its Hepatitis C drug Mavyret, to promote future growth.

Constellation Brands Inc., an international producer and marketer of beer, wine and spirits, is an interesting result since it has the highest EPI on our list, at 3.3. Constellation is currently trading at a 34-per-cent discount after its 12-month drop in stock price of 20.9 per cent.

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

Seeking defensive U.S. health care and consumer staples stocks

CompanyTickerSectorMarket Cap. (US$Mil)EVA 12M Chg. (%) EPIFGV to MV (%)FCF/Capital (%)EPI 12M Chg. (%)Recent Price (US$)
Constellation Brands Inc. STZ-NCons. Staples 33,319.4 208.73.3-34.36.957.0176.45
HCA Healthcare Inc.HCA-NHealth Care 41,493.0 235.12.4-27.85.439.5120.96
AbbVie Inc.ABBV-NHealth Care 113,395.6
Hormel Foods Corp.HRL-NCons. Staples 21,146.1 32.72.423.36.112.539.49
Sysco Corp.SYY-NCons. Staples 35,362.8 71.72.330.46.930.768.82
Bristol-Myers Squibb Co.BMY-NHealth Care 74,225.3 449.
Johnson & JohnsonJNJ-NHealth Care 348,286.7 359.
Procter & Gamble Co.PG-NCons. Staples 258,132.2 53.31.837.24.322.0102.91
Stryker Corp.SYK-NHealth Care 68,497.0 286.11.832.24.261.7183.24
Amgen Inc.AMGN-QHealth Care 102,420.5 387.51.618.18.293.3166.70
Gilead Sciences Inc.GILD-QHealth Care 79,306.5
Celgene Corp.CELG-QHealth Care 66,103.2 209.11.436.216.515.893.79
Walgreens Boots Alliance Inc.WBA-QCons. Staples 45,105.5 154.61.4-23.14.519.049.34

Source: Inovestor for Advisors

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

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 16/04/24 4:00pm EDT.

SymbolName% changeLast
Constellation Brands Inc
Hca Holdings Inc
Abbvie Inc
Hormel Foods Corp
Sysco Corp
Bristol-Myers Squibb Company
Johnson & Johnson
Procter & Gamble Company
Stryker Corp
Amgen Inc
Gilead Sciences Inc
Walgreens Boots Alliance

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