Our U.S. Heroes are the neighbourly cousins of the Canadian Heroes. They’re found using the same data-driven techniques but, in this case, the focus in on the largest 500 stocks in the United States. Each one is ranked and measured for its qualities as a growth investment and as a value investment. The very best make it into the U.S. Hall of Heroes.
The U.S. Heroes have been on a roll since the crash of 2008. They surged 14.5% per year, on average, over the last 10 years while the market (as represented by the SPDR S&P 500 exchange traded fund) gained 10.2% annually.
The good 10-year returns include disappointing results over the last year. Unfortunately, The U.S. Heroes lost an average of 2.8% since the last time. They trailed the market, which gained 3.3% over the same period.
The recent weakness combined with a very poor period leading up to the 2008 crash impacted the U.S. Heroes’ long-term returns negatively. If you had purchased an equal dollar amount of the Heroes in 2005 and rolled your portfolio into the new list of Heroes each year thereafter, you’d have gained an average of 5.5% per year over the last 13 years. By way of comparison, the market gained 6.2% per year over the same period.
(The returns mentioned above do not include dividends, trading frictions, are presented in U.S. dollar terms, and are based on periods between the data collection dates mentioned in each year’s comprehensive data table.)
Our experience illustrates the impact of encountering a rough patch early on. But we do think the U.S. Heroes are worth sticking to. We’ve been particularly encouraged by the strategy’s performance since the crash of 2008.
The search for U.S. Heroes starts with data from Bloomberg. It eliminates stocks with small market capitalizations, very low share prices, and other anomalies from consideration. It then focuses on the largest 500 stocks in the U.S. as measured by revenue.
We employ a bevy of factors to measure each stock for its value potential and then weigh it for its growth appeal. The best are awarded As, solid candidates get Bs or Cs. Stocks that could see improvement get Ds or Fs. Those with good grades are deemed to be worthy of consideration while laggards should be treated with more caution.
The top grades go to stocks that pass the same series of strict tests that we use for the Canadian Heroes. In brief, our growth test favours firms that have increased their sales-per-share and earnings-per-share over the last three years. We like companies with robust returns on equity, good relative performance over the last year, and low-to-moderate price-to-sales ratios. On the value front, we want stocks that sell at modest price-to-book-value ratios in comparison to their peers and the overall market. We also provide points to profitable dividend payers. In an effort to reduce risk, we avoid companies with high debt loads in comparison to their peers.
Stocks are elevated to the top of the Hall of Heroes when they get As on both measures, making them outstanding growth and value candidates. It’s a rare honour and only two got the double-A prize this year. But we think all of the Heroes are well worth your time and consideration. They’re firms that got at least one A and one B on the value and growth tests and a total of 22 firms passed the test this year.
Norm Rothery, CFA, PhD, tweets as @NormanRothery. He may hold some of the securities mentioned in this article. Be sure to read all of the sections of this feature before investing.