What are we looking for?
U.S. equities trading at attractive valuations relative to their sectors, and have experienced positive upward analyst revisions.
The screen
Using the Thomson Reuters StarMine quantitative models, I screened for companies with a market cap greater than $1-billion (U.S.) that rank better than most securities in their industries in terms of positive analyst revisions and sector relative valuation.
StarMine's Relative Valuation model combines six valuation metrics (enterprise value-to-sales; EV-to-EBITDA; price-to-earnings; price-to-operating cash flow; price-to-book; and dividend yield) into a single measure to highlight attractively priced stocks relative to their peers. Trailing and forward-looking multiples are used, where the weighting of each metric is based on analysts' ability to forecast multiples in question. Relative valuation accounts for sector-specific characteristics by comparing each company to its regional peers, thereby avoiding biases in our evaluation. For example, a large number of companies in the energy sector would appear expensive from a P/E perspective relative to all American stocks.
(EBITDA represents earnings before interest, taxes, depreciation and amortization.)
The Analyst Revision model is designed to predict future changes in analyst sentiment, it is based on the premise that revisions occur in clusters, where past revisions by top-ranked analysts are highly predictive of future revisions by laggard analysts. We look at revisions covering companies' preferred component, that is, their most relevant estimate measure (revenue, EBITDA or earnings per share) – allowing us to fine-tune the screen to company/sector specific key drivers.
We screened for preferred earnings analyst revisions and sector relative valuation scores greater than or equal to 80 (companies ranking as well as or better than 80 per cent of their peers across both measures).
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What did we find?
We've limited our results to the largest 15 companies ranked by market capitalization, five of which are airlines, indicating the industry is trading at cheaper valuations relative to other groups within the industrials sector.
This commentary does not provide individualized advice or recommendations for any specific individual or portfolio. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.