What are we looking for?
U.S. retail and consumer discretionary securities with the potential to rebound.
The screen
Today's exercise is an update on a screen we brought you in July of 14 retail companies that had the potential to rebound based on the StarMine Relative Value Ranking model (tgam.ca/2k1yFRd). That model combined six financial ratios (enterprise-value-to-sales, enterprise-value-to-EBITDA, price-to-earnings, price-to-cash-flow-from-operations, price-to-book and dividend yield) to produce a score out of 100. (EBITDA represents earnings before interest, taxes, depreciation and amortization).
Last week, the Street heard the news that big-box-retailer Toys "R" Us Inc. would file for bankruptcy in the United States and aim to restructure $400-million (U.S.) of debt due in 2018. In today's screen, we continue to search for depressed retail securities with the potential to bounce back, but adjust our Relative Valuation Model to include a measure of leverage: net debt to EBITDA.
Toys "R" Us filed its bankruptcy proceedings with an average net debt to EBITDA ratio of 5.48 for 2017, which was well above the industry average of 3.42. Net debt to EBITDA shows how many years it would take a company to pay back debt if the variables are held constant. (In the case of Toys "R" Us, for example, the metric suggests it would take it five-and-a-half years for the company to pay back debt.)
For today's screen we look at U.S. retail and consumer discretionary sector companies with market capitalizations above $1-billion and a negative return over the past six months. We also filtered companies that had a StarMine Relative Valuation rank above 90, and further filtered the model for companies who had a net-debt-to-EBITDA ratio better (lower) than the industry average of 3.42. We aim to identify companies that score high on the Relative Valuation Model, and are at low risk of succumbing to the same fate as Toys "R" Us.
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What did we find?
Our screen identified six North American-listed securities that met our criteria, ranked by net debt-to-EBITDA. Here are two of note:
Dick's Sporting Goods Inc. which has a net-debt-to-EBITIDA ratio of 0.08, a Relative Strength Valuation Rank of 97 and produces a dividend yield of 2.5 per cent. The stock price has fallen almost 41 per cent over the past six months.
GameStop Corp. has a net-debt-to-EBITDA ratio of 0.77, a Relative Strength Valuation Rank of 100 and offers a dividend yield of 7.6 per cent. The security is mostly flat over the past six months, down only 2 per cent.
Investors are encouraged to do their own research before investing in any stocks listed here.
Paul Hoyda, CFA, is a market specialist in the financial and risk division of Thomson Reuters and specializes in governance, risk and compliance.