Five for Friday- Reliable Earnings on the Cheap

After two weeks of growth-oriented screens, we revert to value and earnings quality. We take a unique approach, using two screens to find companies with very dependable earnings and revenue growth trading at cheap valuations.

The scan started with 53 stocks Zacks includes in its Large Cap Earnings & Dividend Quality select list. These companies are predominantly household names with long histories of earnings growth and dividends.

Screening Criteria

We considered the following factors when screening:

• Part of Zacks Earnings & Dividend Quality select list.
• Large Cap
• Must have positive earnings in each of the last 20 quarters (5 years)

This screen occurred in two parts.

The first screening reduced the list to the top ten companies ranked by earnings and revenue growth and, significantly, the reliability of their earnings and revenues. To assess reliability, we use R-squared. R-squared is a statistical measure of how close each quarterly data point is to its trend. The average R-squared for earnings and revenue growth for the top ten stocks is a statistically significant .81.

We share the graph below to highlight what a reliable trend looks like. It charts earnings growth and its trend for LOW. Earnings growth for LOW has an R-squared of .77.

With the initial population of 53 stocks reduced to the ten with the strongest and most reliable earnings and revenues, we then focused on its valuations. We ranked the remaining ten stocks based on where their current P/E and P/S stood in relation to each stock’s average valuation over the last ten years. We use standard deviation to measure the distance between the current valuation and the long-term average.

As shown below, LOW is the only company with a P/E and P/S below its longer-term averages. ACN made the final screen, but its P/E and P/S are above historical averages. HD has the most reliable earnings and revenues and the cheapest P/E valuation; however, its P/S is slightly above average.

Company Summaries

Lowe’s Companies, Inc. (LOW)

United Parcel Service, Inc. (UPS)

The Home Depot, Inc. (HD)

Merck & Co., Inc. (MRK)

Accenture plc (ACN)

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.