U.S.-listed companies indicating superior value and income metrics that help them weather higher inflation.
In the 12 months through February, the U.S. consumer price index rose 7.9 per cent, the biggest annual increase since 1982. Higher inflation can result in higher interest rates and lower corporate profits. Higher inventory and labour costs must be passed on to consumers if manufacturers want to maintain profitability.
But higher inflation does not mean it’s all bad for equities – the stock market tends to do pretty well in an inflationary market as asset prices tend to increase. Of course, some stocks do better than others in a rising rate environment while some greatly underperform.
This week we looked into stocks that potentially could excel amid higher rates.
We will use Strategy Builder, our stock screener, to search for stocks in the basic materials, consumer cyclical, real estate, consumer defensive, utilities, transportation, and energy sectors. These sectors are generally not weakened by a higher rate environment. We removed banks as a large part of their revenue is derived from fixed-rate mortgages, which can result in a profit squeeze if interest rates rise.
Next, we looked for companies in the mid- to large-cap category to screen out the junior, more volatile names in the sectors.
The screen filters for stocks indicating a price-to-earnings ratio of 17.6 or less, and a price-to-book ratio of 3.4 or less, to help us find companies that may be considered undervalued in relation to the broad market. (These thresholds are 20 per cent lower than the S&P 500′s P/E and price-to-book figures.)
We focused on companies with low levels of debt in anticipation of higher interest rates by screening for stocks with a debt-to-equity ratio of 1.15 or less. The higher the ratio, the more leveraged the company is.
In order to create income in a volatile global equity market, which would help offset possible price declines, we also screened for stocks indicating a dividend yield of at least 2.4 per cent, which is one percentage point higher than the S&P 500 average.
Finally, we were interested in companies with a dividend coverage ratio of 25 per cent or higher, which tells us how likely the dividend is to increase. (This is calculated by dividing the trailing 12 months’ earnings per share by the dividend paid over the past fiscal year.) A high coverage means more earnings are available to raise the dividend, or at least making it less likely the payout will be cut.
We have also included four-week, year-to-date and one-year returns.
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.
Topping our list is Kenon Holdings Ltd., a Singapore-based holding company that operates a power generation company with facilities in Israel and the United States. It also holds interests in ZIM Integrated Shipping Services Ltd., a global container shipping company, and in China-based Qorus Automotive. Kenon has the second lowest P/E on our list at just 4.4 and the third-highest dividend yield at 12.5 per cent. The stock boasts the best one-year price performance on our list at 103 per cent.
Exxon Mobil Corp. has the largest market cap on our list at US$350.5-billion. The oil and gas behemoth has the lowest debt to equity ratio at 0.28.
Calgary-based Canadian Natural Resources Ltd. has the second-largest market cap on our list at US$67.4-billion. The stock has the best year-to-date price performance at 34.6 per cent and the second-lowest debt to equity ratio at 0.47.
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.