With the stock market continuing to climb a wall of worry,
focusing on high quality firms becomes ever more compelling. If
and when things head south -- be it our fiscal cliff negotiations
or concerns that Europe still doesn't have a solid long-term
solution to navigate out of its debt crisis, for example -- the
ride will likely be less painful in the big boys with dominant
market share with rock solid balance sheets.
Within that context, focusing on firms with strong return on
, seems especially timely for today's markets. ROE shows how much
a firm is earning on every dollar of equity invested in the
The ROE metric is a central focus for the management team of
the $4 billion Jensen Quality Growth mutual fund. Over the past
15 years Jensen has rung up an annualized return that is nearly
two percentage points better than the S&P 500.
The Jensen managers insist that a company have a 10 year track
record of ROE clocking in at 15% or better.
In a recent note to shareholders, the managers explained that
they wouldn't even make an exception for Apple (
) given that it has just seven years of surpassing that high bar.
(Interestingly, the managers note that about 20% of firms that
manage to beat their ROE test for seven years end up falling
short sometime in the next three. They aren't suggesting Apple
will falter. Their message: 10 years is what we know works for
us, and we're not going to start bending the rules now.)
The five largest holdings in the portfolio (representing more
than 20% of fund assets) are PepsiCo (
), 3M (
), Microsoft (
), Procter & Gamble (
) and Oracle (
PEP Return on Equity
An important caveat is that none of those stocks are a recent
purchase. Procter & Gamble first made its way into the
portfolio in 2000, Oracle is the most recent addition, and that
was back in 2009. All five currently have Neutral ratings from
YCharts. Still, the fact that they remain in the portfolio and
are large positions suggests they still have some mojo.
Sifting through Jensen's recent 13-F filings uncovers more
recent additions, albeit, true to Jensen's style, new names tend
to be very small positions. In the second quarter, among the new
names picked up by Jensen are Altria (
), Portfolio Recovery Associates Inc (
), Energizer Holdings (
), and FLIR Systems (
). None have a current "attractive" rating at YCharts, but are
well worth checking out.
You can also use
YCharts Stock Screener
to find companies with a strong ROE and then chart that metric to
see how long the stock has been a strong ROE-er. After that step
you'll want to check out its current valuation as well. After
all, it's the price you pay that matters most.
Using the Screener turned up more than three dozen companies
that are rated attractive and have high ROEs. A sampling:
) meets the ROE test, trades at a sub 10 PE ratio and its current
is part of a steady dividend growth picture.
AFL Return on Equity
) has the same story to tell: solid ROE, selling at a below
, and for the dividend lovers out there, Medtronic has a nice
habit of consistent payout increases.
MDT Return on Equity
You can put together your own ROE-ing team starting with the
YCharts Stock Screener
Carla Fried is an editor for the
YCharts Pro Investor Service
which includes professional