- Companies that look cheaper relative to expected earnings could be in the midst of a cyclical or one-off re-rating.
- Other firms highlighted are quality businesses that look modestly priced for steady growth prospects.
Our growth at a reasonable price methodology has performed well when applied to the FTSE All-Share index, but as that includes companies that vary greatly in size, it is possible the returns could be down to the selection and weighting of smaller companies. Our new universes, based on the Numis index family, give a better demarcation between large, mid and small-cap shares, with plenty of ideas in each size category. We also have a new US screen that looks at S&P 500 companies.
Highlights this month:
First off the big red flag that needs waving is over the result of Polymetal International (POLY) in the large-cap screen. The precious metal miner has business relating to Russia, so definitely comes into the category of cheap for a reason and should be avoided given the ongoing uncertainties.
Other UK-listed large caps that rate well include equipment hire business Ashtead (ASH); and US-focused plumbing and heating products distributor Ferguson (FERG). Ireland-based DCC (DCC) is interesting, as the sales, marketing and support services business has an important Liquefied Petroleum Gas and Retail & Oil divisions.
Our new US screen applies the large-cap methodology to the S&P 500 index, ahead of a crucial Federal Reserve Open Markets Committee announcement it is hard to gauge the immediate future for growth stocks. On the one hand there is the worry a new Cold War and energy crisis will choke off economic growth, and on the other hand the 40-year-high US inflation needs addressing. If interest rate increases are more aggressive than expected, it will be bad for expensive growth stocks.
Overall, there are five US companies that pass all nine of our tests including FleetCor Technologies (US:FLT), which provides fuel cards and workforce payment products and services; and Charter Communications (US:CHTR), which has a heritage position in US cable TV connectivity, but is now eyeing opportunities from saving customers money with converged wireline and mobile broadband. Two financial services firms, Signature Bank (US: SBNY) and broker Charles Scwhab (US:SCHW), pass 9/9 tests with the latter looking particularly cheap on our PEG ratios. That said, with banks it is always worth assessing whether assumptions on long-run return on equity (RoE), suggest a good return will be made over the likely cost of equity for the business.
Fortune Brands Home & Security (US:FBHS) is the fifth company to get full marks. This business makes home fittings and security solutions. Consensus outlook remains positive, but the potential impact of inflation and any slowing in the US housing market as interest rates rise are serious risks to consider.
Download PDF
