What are we looking for?
U.S. stocks with reasonable valuations in the context of a richly valued market.
Nobel Prize-winning economist Robert Shiller warned at the end of June that the U.S. stock market is among the most expensive in the world right now. Measuring stock prices against 10-year average earnings shows that stocks are more expensive than at any time since 2007. Are there still well-valued stocks to be found?
The screen
We will be using Recognia Strategy Builder to search for U.S. stocks with a track record of earnings growth and poised for further growth in the immediate future.
We begin by setting a minimum market cap threshold of $5-billion (U.S.).
Next, we will look for U.S. stocks with five-year historical earnings per share growth rates of at least 15 per share annually. In addition, we will use analyst consensus estimates to consider only stocks that are projected to grow earnings by at least 10 per cent per year in the coming five years.
To focus on companies with reasonable valuations, we will set a threshold on forward price-earnings ratio at less than 15. Finally, we will also consider only companies with price to book ratios of 1.5 or less. Such companies should resist price movements to the downside more robustly than more richly valued stocks in the event of a U.S. market correction.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Hartford Financial Services has the highest five-year historical EPS growth rate on our list at 95.6 per cent. Based in Hartford, Conn., the company is the 12th-largest property and casualty insurer in the United States. Hartford is well valued with a very reasonable forward P/E ratio of just 11.5. Since insurers must hold large amounts of debt to underwrite the policies that they issue, an environment of increasing interest rates should be positive for Hartford's future growth.
Fiat Chrysler is currently the world's seventh-largest automobile producer with more than 225,000 employees worldwide. Emerging out of the bankruptcy of Chrysler in 2007, Fiat Chrysler has demonstrated impressive earnings growth with a five-year annual EPS growth rate of 62 per cent. Furthermore, analysts expect this growth to continue in the future. The stock is currently not expensive with a forward P/E ratio of just 13.1.
Goldman Sachs Group is the largest company on our list with a market cap of $90-billion. The company has a five-year historical EPS growth rate of over 25 per cent and is expected by analysts to grow for the coming five-year period at approximately 12 per cent per year.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.