What are we looking for?
Undervalued U.S. companies with sustainable growth and upward momentum.
The screen
Two weeks ago we dug into the Canadian market in search of trending stocks with room to grow using the EMG (enterprise multiple to growth) ratio. Like the PEG ratio, EMG measures valuations relative to growth rates where we're taking EV/EBITDA (total enterprise value divided by four quarters of earnings before interest, taxes, depreciation and amortization) and dividing by the sustainable growth rate (also known as reinvestment rate).
This time, my colleague Lawrence Ullman and I turned to the U.S. market using a comparable approach and used Bloomberg to find the top 15 stocks from the S&P 500 with the best mix of:
- EMG ratio (values must be positive, lower is better);
- three-month consensus earnings estimate revision (cannot be negative);
- latest earnings surprise (cannot be negative);
- three- and 12-month price change (three-month change cannot be worse than negative 15 per cent)
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.
What we found
Using Bloomberg, we performed a back-test starting May 31, 2002, reselecting an equally weighted portfolio of the top 15 qualifying stocks every three months.
Over the 13-year period, this strategy would have generated an annualized total return of 14.3 per cent compared with 7.5 per cent for the S&P 500 total return index. Following the strategy over the past year would have resulted in a return of 18.4 per cent compared with 11.8 per cent for the index.
The opinions expressed in this report are the opinions of the authors and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.