10 stocks for investors looking for 'wonderful companies at a fair price'

By Philip van Doorn

Investors are probably overlooking this group of consistent performers in the stock market

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   FR:DIM   SRTOY France                                            21.8%                                       12.4% 
   Sartorius AG                  XE:SRT   SSSGY Germany                                           18.1%                                       10.8% 
   ASML Holding NV               NL:ASML  ASML  Netherlands                                       17.8%                                       10.5% 
   Davide Campari-Milano N.V.    IT:CPR   DVCMY Italy                                             15.4%                                        8.2% 
   Teleperformance SA            FR:TEP   TLPFY France                                            13.2%                                       12.7% 
   EMS-Cgemie Holding AG         CH:EMSN Switzerland                                       10.5%                                        5.6% 
   Dassault Systemes SA          FR:DSY   DASTY France                                            10.1%                                        9.0% 
   Hermes International SCA      FR:RMS   HESAY France                                            10.0%                                       10.5% 
   Coca-Cola HBC AG              UK:CCH   CCHGY Switzerland                                        9.8%                                        5.2% 
   L'Oreal S.A.                   FR: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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-Philip van Doorn

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01-20-24 0620ET

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