Winning Growth & Income is a dividend investing strategy inspired by an approach used by American investment analyst Kevin Matras in his book, Finding #1 Stocks. It combines growth and dividend factors by sorting the market for high yielding companies with strong growth characteristics. Apart from a high yield, this strategy looks for companies with an above average return on equity, a below average price-to-earnings ratio and where analysts have been upgrading their earnings forecasts. It also looks for companies with a low beta (the sensitivity of a share price to the movement of the market). Kevin Matras says the screen works for investors that are "looking for good companies with solid revenues that pay a good dividend". In some respects, this strategy is a small cap version of the Large Cap Dividend Attraction strategy. In Matra's original strategy criteria he uses Zacks Rank, which is a metric for analysing analyst forecasts. more »
This shows the percentage EPS upgrade of consensus broker forecasts for FY2 over the past three months.
FY2 means the next forecast year after this one. If we are in March, it would usually be the year ended the December after next December. It does however depends when the company's year-end is, i.e. they do not always end in December (this is not the case with a rolling ratio which is normalised for different year-ends).
Stockopedia explains % 3m EPS Upgrade FY2...
Research has shown that analysts forecasts have a tendency to trend. Analysts often get 'anchored' to their previous forecasts and only ratchet forecasts up or down cautiously in reaction to new events.
Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. The DuPont formula is a common way to break down ROE into three important components. Essentially, ROE will equal the net margin multiplied by asset turnover multiplied by financial leverage.
It is defined as Income available to Common Shareholders (excl Extraordinaries) divided by the Average Book Value over the period.
Stockopedia explains ROE %...
Widely used by investors, the ROE ratio shows the return being generated for every pound of equity on the balance sheet. It should be thought of as the 'internal return' that the company generates, and should not be mistaken with the market returns that shareholders may attain.
It varies by industry but ROEs of 15% or over are usually considered desirable. High ROE numbers sustained over the long term may indicate a company has a 'sustainable competitive advantage'. Such companies tend to sell at higher valuation multiples.
The impact of leverage is one of the disadvantages of focusing on ROEs as it can skew ROE upwards - an alternative is to look at Return on Capital Employed.
The Price to Earnings Ratio (also called the PE ratio) is the primary valuation ratio used by most equity investors. It is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. A high P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with a lower P/E ratio. The P/E ratio can be seen as being expressed in years, in the sense that it shows the number of years of earnings which would be required to pay back the purchase price, ignoring inflation.
This is a rolling ratio which means that it weights FY1 and FY2 forecasts depending on how far a company is through its reporting period. This makes apples and oranges more comparable - otherwise you might be comparing one company on a forecast P/E for a company reporting tomorrow with a company reporting in 11 months!
Stockopedia explains P/E Rolling 1y...
Investors have a tendency to overreact becoming enamoured with glamour stocks (pushing their PE too high) while becoming disenchanted with value stocks (pushing their PE too low). Research has shown that low P/E ratio stocks tend to outperform high PE stocks in the long run. On the other hand, there are many investors who believe that you should 'pay up for quality' in the same way people pay for jewellery - the best growth stocks therefore rarely trade for cheap PE multiples.
Unlike the EV/EBITDA multiple which is capital structure-neutral, the price-to-earnings ratio reflects the capital structure of the company in question. The reciprocal of the P/E ratio is known as the earnings yield.
Also known as Gearing, this is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity.
The formula is : Total Debt / Book Value of Equity
It uses the book value of equity, not market value as it indicates what proportion of equity and debt the company has been using to finance its assets. It includes intangibles.
Stockopedia explains Gross Gearing %...
The gearing ratio shows how encumbered a company is with debt. A highly-geared company is more vulnerable to a sudden bump in the road, either operationally or due a change in the economy (e.g. a recession or an increase in interest rates).
The dividend yield shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. It is calculated as the historic or consensus forecast Annual Dividend per Share, divided by the current Price, multiplied by 100, and is stated on a net, rather than gross, basis.
Stockopedia explains Yield %...
In the absence of any capital gains, the dividend yield is the return on investment for a stock. A higher dividend yield is often considered to be desirable among many investors but it needs to be interpreted in light of the rest of the company's financials.
A high dividend yield may be considered to be evidence that a stock is under priced or alternatively it may be that the company has fallen on hard times and future dividends are at risk of being cut. Similarly a low dividend yield can be considered evidence that the stock is overpriced or an indication that future dividends may be higher. Many growth companies do not pay dividends, preferring to reinvest profits back into the business.
Beta is a measure of a company's common stock price volatility relative to the market. It is calculated as the slope of the 60 month regression line of the percentage price change of the stock relative to the percentage price change of the relevant index (e.g. the FTSE All Share). Beta values are not calculated if less than 24 months of pricing is available.
According to asset pricing theory, beta represents the type of risk, systematic risk, that cannot be diversified away. By definition, the market itself has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market. A stock with a beta of 2 has returns that change, on average, by twice the magnitude of the overall market's returns; when the market's return falls or rises by 3%, the stock's return will fall or rise (respectively) by 6% on average.
When using beta, there are a number of issues that you need to be aware of: (1) betas may change through time; (2) betas may be different depending on the direction of the market; (3) the estimated beta will be biased if the security does not frequently trade; (4) the beta is not necessarily a complete measure of risk, 5) the beta is a measure of co-movement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market.
Theoretically, higher-beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Some have challenged this idea, claiming that the data show little relation between beta and potential reward.
The Market Cap is a measure of a company's size - or specifically its total equity valuation. It is calculated by multiplying the current Share Price by the current number of Shares Outstanding. It is stated in Pounds Sterling.
Stockopedia explains Mkt Cap £m...
Market Capitalisation only takes into account the value of the company's shares (equity), it ignores the amount of debt a company may have taken on and therefore isn't the best indicator of the company's size. The Enterprise Value adds the net debt to the Market Cap and is a better indicator of the minimum amount that an acquiring company may have to pay to buy the firm outright.