The World’s Best Businesses At A Discount
In today’s Saturday Stock Screen, we’re taking a look at high-quality companies trading at discounts to their historical valuations.
Each week, here at Porter & Co. we apply our brainpower to uncover the most compelling, highest-upside investment ideas. And with this complimentary issue of the Daily Journal, we draw the curtain back to show you how we do it.
An important tool in our analytical toolbox is our stock screens, in which apply a list of criteria – relating to different financial, accounting, and performance parameters – to sift through the 3,000+ publicly traded stocks on U.S. markets. That’s how we are able to identify the tiny fraction of the universe of U.S.-listed stocks that offer the best opportunities for making money.
We often use the results from these screens as a starting point for more in-depth analysis for possible inclusion in The Big Secret On Wall Street portfolio.
In a Daily Journal published on March 5, Porter delivered a prescient warning to investors that it “seems like we’re on the verge of a market panic.” He also provided a key indicator to watch for that would signal a buying opportunity: when the CBOE Volatility Index (VIX) rose above 30.
Fast forward one month, and the escalating global trade war has unleashed the panic Porter warned about, sending global stock markets into free fall and the VIX rising above 40 on Friday. But even more important than when to buy, is what to buy, as Porter explained:
What really matters? Understanding which stocks are going to produce far higher than average results is important.”
The recent market turbulence has created a growing list of bargain opportunities in high-quality businesses. While we acknowledge more pain is likely in store for the overall market near term, we believe now is the time to start preparing a shopping list of stocks of world-class businesses to begin accumulating for long-term investors. To help you prepare this shopping list, this week we’re showing the latest results from a screen designed to identify the world’s greatest businesses trading at discounted valuations.
For Partner Pass members, we’ll often highlight an opportunity from the screen, or elsewhere, that appears particularly compelling – not as an official recommendation, but as a stock that’s on our radar.
Questions about our Saturday Stock Screen?… drop us an email at [email protected].
The filtering tool we’re showcasing this week is named “The World’s Best Businesses At Discounted Valuations Screen.”
We created this screen to identify capital efficient business models that not only generate above-average cash flow, but that return a lot of cash to shareholders over time as well. We also added a screening criteria to identify when these businesses trade at discounts to their historic valuations, as detailed below:
- Return on assets (“ROA”) exceeding 15% over the last five years, as a filter for capital efficiency
- Free cash flow (“FCF”) margins exceeding 10% over the last five years, to select for businesses with above-average cash flow generation
- Shareholder returns (including dividends and buybacks) that exceed 10% of the total market capitalization of the business over the last five years
- Annual revenue increasing at more than 4% over the last five years, to select for businesses with steady growth
- Market capitalization over $1 billion to exclude micro-cap, low-liquidity stocks
We rank each of the stocks from this screen based on their current valuation versus their 10-year average, defined as the enterprise value (market capitalization plus net debt) to free cash flow (“EV/FCF”) multiple.
As of Thursday’s close, this screen produced the following 31 stocks, ranked in order from greatest valuation discount to least:
Highs And Lows
Each week, we also monitor any stocks in the market making new 52-week highs. We do this because any stock on its way to generating 2x, 3x, or 10x returns will spend a lot of time making new 52-week highs along the way. Thus, the new 52-week-high list provides an opportunity to flag these potential high performers before they really break out, with a particular emphasis on lower-profile, less widely-followed stocks that might have otherwise gone unnoticed.
Notable stocks making new 52-week highs last week:
- Agnico Eagle (AEM)
- Alamos Gold (AGI)
- Albertsons (ACI)
- Antero Midstream (AM)
- Arthur J. Gallagher (AJG)
- AutoZone (AZO)
- Cardinal Health (CAH)
- Chubb (CB)
- Coca-Cola (KO)
- Franco-Nevada (FNV)
- Hartford Insurance (HIG)
- Kroger (KR)
- McKesson (MCK)
- Philip Morris International (PM)
- Republic Services (RSG)
- Rollins (ROL)
- Spire (SR)
- Waste Connections (WCN)
- Waste Management (WM)
We also monitor stocks on the new 52-week-low list. In many cases, the names on this list are there for good reason – the market is often correctly pricing in their weak fundamentals. However, once in a while, a great business with excellent long-term prospects finds itself on this list due to a temporary setback. This can create the rare opportunity to buy top-shelf merchandise at bargain-basement prices.
Notable stocks making new 52-week lows last week:
- Warrior Met Coal (HCC)
- Albemarle (ALB)
- Alpha Metallurgical Resources (AMR)
- BHP (BHP)
- Builders FirstSource (BLDR)
- Caterpillar (CAT)
- Charles River Laboratories (CRL)
- D.R. Horton (DHI)
- Deckers Outdoors (DECK)
- Estée Lauder (EL)
- FedEx (FDX)
- Gartner (IT)
- Hovnanian Enterprises (HOV)
- Restoration Hardware (RH)
- Rockwell Automation (ROK)
- Thermo Fisher (TMO)
Good investing,
Porter & Co.
Stevenson, MD
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