As money managers talk about various methods of selecting quality companies, investors might also think about diversification, which can lower risk and broaden opportunities.
Investors in the U.S. are likely to take advantage of low-cost index funds, such as the SPDR S&P 500 ETF Trust
SPY,
and with patience, they have been rewarded over the long term. But some investors like to select individual stocks. Hopefully, an individual investor following this type of strategy spreads risk over dozens of holdings — after all, even veteran pros will select some companies heading for disaster. And if one stock crashes, the effect on your portfolio won’t be terrible if your risk is spread out.
You can also look away from U.S. stocks to diversify further.
Mark Phillips, an equity strategist at Ned Davis Research, published a list of 31 “wonderful European companies at a fair price” on Jan. 16. In a report to clients, he wrote that the firm’s data analysis showed that companies showing consistent returns on assets (ROA) had outperformed the broad European stock market consistently.
To come up with the list of 31 stocks, analysts at NDR began by identifying “quality companies,” defined as those with an average 10-year ROA of at least 5% and no annual ROA below zero for any of the past 10 years. Then they narrowed the list to “wonderful companies,” which were quality companies whose average ROA over the past two years was higher than their average 10-year ROA.
To narrow further to “wonderful companies” trading at fair prices, the NDR team looked at earnings yields (a year’s earnings per share divided by the share price). They calculated the companies’ relative earnings yields by dividing by the median earnings yield for the MSCI Europe universe of stocks.
NDR ended up with a list of 31 “wonderful stocks at a fair price,” which were those that had passed the screens and whose most recent relative earnings yields were above their three-year averages.
Through backtesting, NDR found that the first “quality” list would have outperformed the broad European stock market on an equal-weighted or market-capitalization-weighted basis (rebalanced every two months) over the past 10 years. The results were better for the “wonderful” list and best for the “wonderful at a fair price” list.
Looking ahead to narrow the list of ‘wonderful European companies at a fair price’
To narrow the list from 31 companies, we looked at consensus calendar-year earnings-per-share estimates through 2025 among analysts polled by FactSet.
According to FactSet’s weighted aggregate estimates, the STOXX Europe 600 Index
XX:SXXP
(which covers about 90% of the free-floating market cap of European equities) is expected to show a two-year compound annual growth rate (CAGR) for EPS of 7.4%.
10 of NDR’s 31 “wonderful European companies at a fair price” are expected to show a two-year EPS CAGR of more than 8% through 2025.
Here they are, sorted by expected two-year EPS CAGR:
| Davide Campari-Milano NV | Ticker | ADR | Country | Two-year estimated EPS CAGR through 2025 | Two-year estimated sales CAGR through 2025 |
| Sartorius Stedim Biotech SA |
DIM, |
SRTOY, |
France | 21.8% | 12.4% |
| Sartorius AG |
SRT, |
SSSGY, |
Germany | 18.1% | 10.8% |
| ASML Holding NV |
ASML, |
ASML, |
Netherlands | 17.8% | 10.5% |
| Davide Campari-Milano N.V. |
CPR, |
DVCMY, |
Italy | 15.4% | 8.2% |
| Teleperformance SA |
TEP, |
TLPFY, |
France | 13.2% | 12.7% |
| EMS-Cgemie Holding AG |
EMSN, |
Switzerland | 10.5% | 5.6% | |
| Dassault Systemes SA |
DSY, |
DASTY, |
France | 10.1% | 9.0% |
| Hermes International SCA |
RMS, |
HESAY, |
France | 10.0% | 10.5% |
| Coca-Cola HBC AG |
CCH, |
CCHGY, |
Switzerland | 9.8% | 5.2% |
| L’Oreal S.A. |
OR, |
LRLCY, |
France | 8.5% | 6.9% |
The tickers on the left are those in the countries where the stocks are listed. The ADR column has tickers for American depositary receipts (if available), which can be easier for U.S. investors to buy and sell.
The table also includes the companies’ expected sales CAGR through 2025, which compares with a weighted estimate of 2.6% for the STOXX Europe 600, per FactSet’s data.
If you are selecting individual stocks for investments, any screen should only be a starting point for your own research. One way to begin that process is by clicking on the tickers.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
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