What are we looking for?
U.S. companies that are showing a negative trend in economic profit while any premium "baked" into the stock price for expected growth is increasing, putting the investor at a higher risk.
The screen
We have screened the S&P 500 with a set of five different criteria designed to identify companies showing an inverse relation between their economic performance (decreasing) and their trading multiples (increasing).
- A future growth value (FGV) higher than 30 per cent. The FGV represents, in percentage, the portion of the total market value that exceeds the company’s current operating value. The higher the number, the higher the baked-in premium for expected growth – and the higher the risk;
- An increasing FGV, in percentage, over the past three and 12 months;
- A net operating profit after taxes (NOPAT) decreasing over the past three and 12 months.
(The price-to-earnings ratio is shown in the table but was not part of the filtering criteria.)
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Ten companies of the S&P 500 are identified by our screen. While they are not necessarily bad companies, we still consider these stocks as risky to own. A positive and growing future growth value (premium) can be reasonable as long as the economic profit is increasing, which is not the case here. As an example, Bristol-Myers Squibb Co. has seen its NOPAT melt by 31 per cent in the past 12 months, but the FGV (premium) has increased 24 per cent over the same period.
The recent market pullback certainly offers many interesting buying opportunities, but investors should still be very careful when choosing a stock to own for the long run.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.