In another sign the U.S. economy remains resilient to the effects of a weak housing market, businesses added a surprisingly strong number of jobs in December. Given that personal consumption spending accounts for roughly 70 percent of GDP, protracted strength in the labor market is a positive sign for the economy. It is also a positive sign for companies like IKONICS Corp. (NASDAQ:IKNX) that are sensitive to the ebbs and flows of consumer activity. The photography-equipment company showed up on the Reuters Select stock screen for Industry Leaders.
In stark contrast to the downward revision in third-quarter GDP that led us to focus on non-cyclical stocks in our Dec. 21 article, the labor market showed strength in December. In fact, the final months of 2006 were relatively solid for jobs, according to government figures. For instance, in the January-through-July period, the economy added about 998,000 jobs, although that was off more than 18 percent from the number added in the prior-year period. Yet, in the August-through-December span, the economy created more jobs each month, save one, than it did in 2005. As a result, more than 1.8 million people were added to the payrolls for all of last year, off about only 7 percent from 2005's full-year reading.
More people working suggests more people have income to spend. Combine this with the government-reported increase in wages, and the picture seems to brighten for consumer-cyclical companies from what we saw several months ago. In our search for opportunities in this arena, we started with the list of 399 consumer cyclical companies in the Reuters.com stock universe and then filtered for all the names that recently appeared on at least one Reuters Select stock screen. This left us with a list of 27 companies. (Click here for an Excel sheet comparing these 27 companies.)
We want companies that are growing, but, at the same time, we also want stocks that are trading at reasonable valuations on the basis of different metrics. Our next step, then, was to filter for companies that have been posting revenue and earnings-per-share [EPS] growth rates that surpass the averages for their respective industries for both the trailing 12-month [TTM] and five-year periods. This dropped our list to seven names, including IKONICS. Further, this hurdle is also a key driver of the Industry Leaders screen, which requires that a company's five-year performance must be at least 10 percent above the industry norm.
Next, we weighed valuation and filtered for companies where the price to earnings (P/E) ratio was less than the industry norm. This shortened the list to only three companies.
Here, too, IKONICS also satisfied a condition of the Industry Leaders screen: To stand among the Industry Leaders, a stock's P/E must be no higher than 10 percent above the industry average.
We also want some indication of quality and management effectiveness. For this, we filtered for companies with ROI figures that are above the industry mean in both the TTM time frame and over the last five years. But, we also want companies that have been improving, so we also screened to identify companies where the TTM ROI is superior to the company's own five-year average ROI. This left us with only IKONICS.
ROI is calculated as net income divided by shareholder equity, long-term debt and all other long-term liabilities. One factor that contributes to net income is the company's profit margin. Wider margins allow more revenue gains to make their way to the bottom line and boost net income. Although the Industry Leaders screen does not take into consideration ROI, it does factor in profit margins: It requires that a company's TTM net profit margin must be at least 10 percent wider than the industry norm. Many of IKONICS's profit margins, in both the TTM and five-year periods, surpass the industry readings.
Finally, to be counted as an Industry Leader, a company must have relatively less debt. Specifically, the company's total debt to equity ratio must be less than the industry norm. IKONICS appears to have a solid balance sheet, with effectively no debt and considerably more cash, which is a striking difference from the industry averages.
Disclosure: At the time of publication, Erik Dellith did not directly own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.