13 ways to play a resurgent USA

Source: S&P CapitalIQ

The results would have been even stronger (a 31.3 per cent total return) if it was not for the inclusion of troubled defence company Chemring. Hopefully it does not seem too disingenuous to draw attention to the ex-Chemring performance as in our write-up of the 2012 screen results we did suggest that, given issues surrounding US defence spending, Chemring was "perhaps the best example of why the results from stock screens are a starting point for further research, not a conclusion".

However, the observation of how much better performance could have been without Chemring, and the irksome reality that a screen is really something that exists in its entirety and without caveats, encouraged us to find out if tweaking last year's screen to take account of three-month momentum would have changed things. And it would have - substantially.

If our 2012 screen had only focused on stocks that had outperformed the FTSE 350 in the previous three months as well as passing the other tests, then the five stocks making the grade would have produced a phenomenal 39.5 per cent average total return. This compares with a sub-index 4.4 per cent total return from the stocks failing the momentum test.

Given the recent ascendancy of the US growth/recovery story, it is perhaps not too surprising that all of the 13 stocks passing our 2012 screen criteria this time around have also demonstrated superior share price momentum over the past three month. As well as our new momentum test the stocks had to meet the following criteria:

* At least a quarter of revenues must be derived from the US - the way companies report geographic segments vary and in our tables we've noted the wording used by the companies, which can be as broad as “The Americas”. Unfortunately we haven’t found a way of getting more specific.

* Underlying EPS growth in each of the past three years.

* Forecast EPS growth.

* DPS growth in each of the past three years.

* Net debt of less than three times cash profits.

* Return on equity of 10 per cent or more.

Given the strong run experienced by shares recently, the potential of stocks to become overpriced could start to emerge as a brake on performance in the coming 12 months. So below we have looked at the cheapest five shares that made it through the screen based on our genuine value (GV) ratio, which looks at a company's earnings-based valuation, taking account of cash and debt, and likely total return in the coming year: (EV/EBIT)/(DY + forecast EPS growth)

InterContinental Hotels (IHG)

In 2012 InterContinental generated 63 per cent of its profits from the Americas and prospects for the current year look good. Indeed, the group reported a 7 per cent increase in revenue per available room in January and prospects should be underpinned by subdued hotel building activity. Over many years the group has been in the process of transforming itself from a hotel owner to an operator and two big hotels, the New York Barclay and the InterContinental London Park Lane, are currently on the market. Brokers believe progress with the sales could result in a $1bn return of capital this year. Trading in Europe is challenging, but the region only accounts for a relatively modest 24 per cent of revenue and 15 per cent of profits. The shares do not look that cheap based on the forward PE and are rated in line with sector peers, but following a 16 per cent increase in the full-year dividend the yield looks useful and strong EPS growth is forecast (last IC view: Hold, 1,938p, 19 Feb 2013).

Source: S&P CapitalIQ

Micro Focus (MCRO)

Software modernisation specialist Micro Focus bills itself as a company aiming to generate moderate growth. The shares' valuation compared with forecast earnings, which is at a discount to the sector, suggests the market is not too impressed by such modest sounding ambitions. However, the attractions of the strategy should not be overlooked. As well as a growing reputation for delivering a solid performance, the company has returned an impressive amount of cash to shareholders. On top of the dividend, the group paid out the equivalent of 50p last year and broker Numis thinks there is the prospect of cash returns of 160p per share over the next two years, on top of total returns (earnings growth plus dividend) of about 10-to-12 per cent a year. The company, which aims to make strong returns on investment, has also been bolstering its business with acquisitions and broker Panmure believes this could potentially lead to a significant change in focus - moving from being a "modernisation company" to an "applications modernisation company" - which could in turn lead to a re-rating of the shares (Last IC view: Buy, 577p, 7 Dec 2013).

Intertek (ITRK)

While we do not have up-to-date figures for the contribution of the US to overall Intertek revenues, it is fair to assume that it remains some way over 25 per cent. The testing company is one of the market's favourite 'structural growth' plays. The growth is being driven by ever-increasing regulation on product quality and the growing complexity of supply chains, which is routinely punctuated by headline-grabbing events, such as the recent furore over horse meat in processed food. However, the real proof of the company's enviable position regarding its end markets is evident in its growth record. Broker Numis forecasts ongoing high single-digit organic growth and incremental margin improvements. However, the company also has a record of boosting growth through acquisition and its last big deal, the purchase of commodities testing business Moody, has now been bedded down. What's more, Numis forecasts that net debt will be less than one times cash profits by the end of the year, so another major acquisition could be on the cards and the group's past successes means the market is likely to welcome such a purchase (Last IC view: Hold, 3,379p, 4 Mar 2013).

Unilever (ULVR)

It is the focus of consumer brand behemoth Unilever on emerging markets, which account for 55 per cent of sales, that is one of the biggest draws for investors at the moment. The company achieved sales growth of 11.4 per cent from these regions last year. Any improvement in performance from the US will also be a bonus, though, and the group has low exposure to the most troubled European economies. But the company's growth potential comes down to more than just its geographic positioning. Management has been moving the focus of the group's leading brands into higher-growth, high-margin product categories. This effectively means disposing of food brands and expanding personal care sales. Margins have also been on the rise recently and broker Panmure Gordon believes there is significant medium-term upside on this front. The balance sheet is also strong, with forecasts that the group could have net cash in two years' time if no major new investments are made. What's more, despite a strong run recently, the shares look cheap against the international peer group, with Panmure estimating the discount at 9-11 per cent based on its forecast enterprise-value-to-cash-profits ratio of 11.9 times compared with a 13.3 times average for rivals (Last IC view: Buy, 2,511p, 23 Jan 2013).

Diageo (DGE)

Diageo has been at the forefront of the drinks industry's push into emerging markets through acquisition and the strategy continues to pay off handsomely for the group, with substantial growth being achieved in such regions as the growing middle classes look to buy higher-end booze. Fast-growing markets account for 42 per cent of Diageo's net sales and they delivered organic growth of 14 per cent in the first half. The strong performance in these regions has also helped the company push up margins. Meanwhile, the US has also been solid recently and should benefit from improved economic conditions. Europe, however, continues to struggle, which helps underline the shrewdness of Diageo's strategy. The group recently announced plans to localise supply chains, which underlines the increased diversity of its markets (Last IC view: Hold, 2,005p, 11 Mar 2013).

The rest

Source: S&P CapitalIQ