S&P's latest screen finds companies in its Consumer Discretionary sector with top STARS, Fair Value, and Quality scores
From Standard & Poor's Equity ResearchAh, the holidays. A time of good cheer, abundant calories, massive credit-card bills—and a white-hot spotlight on retailers and consumer-goods companies.
It's telling that, even amid worries about the effect of the housing slump on U.S. consumers' willingness to spend, the cash registers continue to ring. The retail sales report released Dec. 13 showed a greater-than-expected rise of 1.2% on the month, along with upward revisions to the headline figures for September and October.
In the spirit of the season, we built this week's screen to find some of the most attractive plays in the Standard & Poor's Consumer Discretionary sector, home to a large number of big retailers and well-known consumer products names. We first screened for Consumer Discretionary stocks ranked 4 STARS (buy) or 5 STARS (strong buy), meaning that S&P analysts expect them to outperform the Standard & Poor's 500-stock index over the coming 12 months on a total return basis, with the shares rising in price on an absolute basis.
Winnowing the Field
We narrowed the list further by using S&P's proprietary Fair Value model, a quantitative stock ranking system. The model calculates a stock's weekly Fair Value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, return on equity, current yield relative to the S&P 500, and price-to-book value. Stocks are ranked from 5, indicating significant undervaluation compared to the Fair Value universe, to 1, indicating significant overvaluation. We looked for those issues ranked 4 or 5.
We got even pickier: Companies had to have an S&P Quality Ranking of B+ or above, based on long-term history of earnings and dividend growth. In addition, we looked for stocks with a return-on-equity and a projected five-year earnings-per-share growth rate above 15%.
To avoid speculative issues, each stock had to have a per-share price above $5 and a market capitalization greater than $1 billion.
And the Winners Are…
After we completed our search, nine names turned up:
Abercrombie & Fitch (ANF)
Bed Bath & Beyond (BBBY)
Best Buy (BBY)
Harman International Industries (HAR)
Lowe's Cos. (LOW)