What are we looking for?
The U.S. earnings season is upon us. Looking at earnings in the broad S&P 500 index that have reported in the current quarter, 87 companies have reported so far. The largest earnings beats have been in the basic materials, industrials, consumer cyclical and consumer defensive sectors.
This week we screened for companies that have the possibility of upside earnings momentum and can weather higher interest rates because of their above-average dividend yield, low valuations and high profitability.
The screen
We will use Strategy Builder, our stock screener, to search for stocks in the basic materials, consumer cyclical, consumer defensive and industrials sectors. These sectors are generally not weakened by a higher rate environment, which could be the reason for the sectors’ strong start to this quarter’s earnings season.
Next, we looked for companies that have had a positive price performance year-to-date in order to avoid stocks in bearish trends.
The screen filters for stocks indicating a price-to-earnings ratio of 15 or less. Stocks with below average P/E ratios relative to the broad market are favourable during periods of high inflation.
In order to create income in a volatile global equity market, which would help offset possible price declines amid higher interest rates, we screened for stocks indicating a dividend yield of at least 2.5 per cent. The average yield of the S&P 500 sits at 1.9 per cent.
We were interested in companies that are indicating a gross margin of 15 per cent or higher. Gross margin measures the percentage of revenue left after paying all direct production expenses. Higher margins will help the company withstand higher costs in the current rate environment.
Finally, we screened for companies with a five-year earnings per share growth rate of at least 10 per cent in order to provide a longer term view of how the company has grown its earnings.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities.
What we found
Topping our list is Ternium SA, a producer of steel products with operations in South America and the United States. The company has the highest dividend yield on our list at 5.5 per cent and just raised its dividend in March. Its gross margin is the second-highest on our list at 38.5 per cent. Looking at the company’s P/E, it is the lowest at just 2.4. Ternium’s first-quarter earnings are expected on April 26.
LyondellBasell Industries NV, a manufacturer of plastic, chemical and fuel products, has the largest market capitalization at US$36.4-billion. The company is indicating a dividend yield of 4.1 per cent and a P/E of 6.6. The company’s first-quarter earnings are due on April 29.
U.S. department store chain Kohl’s Corp. has the highest gross margin at 41.2 per cent. Looking at stock price performance, Kohl’s has the second-best year-to-date share price performance on our list at 22.2 per cent. The company’s first-quarter earnings are expected on May 20.
Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had an annualized five-year total return of 7 per cent, compared with 13 per cent for the S&P 500 on the same basis.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
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Gary Christie