A back-to-basics strategy for handling volatility

In this most recent Globe and Mail article, Peter Ashton uses our Strategy Builder product to evaluate large-cap U.S. consumer staples stocks providing safety and value in a declining market.

What are we looking for?

October and November have been challenging months for U.S. equity investors as the major indexes have declined sharply from their highs. Since early October, the S&P 500 index is off 9 per cent and the Nasdaq Composite Index is off more than 14 per cent. According to Bloomberg, all market sectors are down over the past three months, with the exception of utilities and consumer staples.

 

The Screen

We will be using Trading Central Strategy Builder to search for consumer staples stocks that have reasonable valuations and offer safety in light of recent market volatility. We start by screening for stocks with a mar-ket capitalization of US$10-billion or more. We wish to focus on U.S. corporate giants with consistent revenue and stable long-term businesses.

Next, we search for stocks that have reasonable valuations. We will filter and include only stocks with trailing price-to-earnings ratios of 25 or less based on the most recent sell-off. As a further valuation check, we will include only stocks with price-to-book ratios of 5 or less. These two valuation criteria eliminate roughly 75 per cent of consumer staples stocks. To find stocks with profitable and efficient operations, we will include only stocks with return on equity of at least 10 per cent each year. ROE is a measure of how efficient a company is at putting invested capital to work.

Finally, to ensure we get paid while our investments appreciate, we will also include only stocks with dividend yields of 1.5 per cent or more.

 

What did we find?

Topping our list is prepared food giant Kraft Heinz Co. (KHC). The company looks very inexpensive with a trailing P/E of 6 and P/B ratio of 0.9. This low valuation is in part because of the stock’s de-cline of roughly 38 per cent from its 52-week high set last December. The stock’s resulting dividend yield of 4.7 per cent is also the highest on our list.

The highest return-on-equity belongs to Keurig Dr. Pepper Inc. (KDP) at 46.9 per cent. This Texas-based conglomerate was previously Keurig Green Mountain until it acquired Dr. Pepper Snapple in July. In the past quarter, the company has added 14 per cent to its stock price and now offers a 2.2-per-cent dividend yield.

Consumer products giant Procter & Gamble Co. (PG) has the highest market cap in our list, in excess of US$229-billion. P&G is a defensive stalwart and has a long track record of growing dividends. In spite of the recent market downdraft, P&G stock has added 9 per cent over the preceding quarter.

 


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.

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