Five For Friday- Growthy Value with Little Debt

This week, we perform a variation of our screen from early November, “Small Cap Value with Little Debt.” This version is born from some investors being uncomfortable in the small-cap space, where household names are few and far between. Additionally, it can be difficult for institutions to invest in small caps due to the need for trading liquidity. Using last month’s small-cap screen as an example, we can’t put any stocks in our models simply because we have too much size for the liquidity environment.

Thus, this week’s variation appeals to a broader array of investors by screening for large-cap stocks with little debt and reasonable valuations. We loosened the screen criteria to reflect that large-cap “value” stocks tend to trade at higher valuations than their small-cap counterparts. The P/E ratio of the S&P 500 index is currently near 25, while the forward P/E ratio is hovering near 20. That said, we adjusted our P/E criteria to look for stocks cheaper than the index. Finally, large-cap stocks tend to utilize more debt in their capital structure, so we raised the Debt-to-Equity threshold to 0.3 from 0.2.

Scan Criteria

• Market Cap > $10 billion
• Debt to Equity ratio <.30
• P/E <25
• Forward P/E <20
• EPS Growth Next 5yr Forecast >10%

These stocks wouldn’t be considered “deep value.” … One could even argue that they generally trade at the higher end of value thresholds. However, in most instances, there’s a sweet spot between stocks with the cheapest valuations and those that perform alongside or better than the market. Screening for the cheapest stocks outright could funnel investors into value traps as often as legitimate value opportunities. It may also introduce a bias towards out-of-favor sectors, as the technology sector (which has driven market gains this year) is biased towards higher valuations. So, while these stocks aren’t the cheapest in the index, they may be less likely to lag the market than some deep-value options.

Company Summaries

Berkshire Hathaway Inc. (BRK-B)

Arch Capital Group Ltd. (ACGL)

Skyworks Solutions, Inc. (SWKS)

Exxon Mobil Corporation (XOM)

Everest Group, Ltd. (EG)

Five for Friday

Five for Friday uses stock screens to produce five stocks that we expect will outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Investment themes may not always represent our current forecast. 

Disclosure

This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.