Cautious growth stock investors might tend to look within the large-cap universe for consistent growth, low price-earnings ratios and generally a reasonable price to pay for the growth.
This article identified 16 candidates for that profile, based on the intersection of the holdings of three Russell 1000 (proxy IWB) discipline sub-indexes: Large-Cap Consistent Growth (proxy CONG), Large-Cap Low P/E (proxy LWPE) and Large-Cap Growth At a Reasonable Price (proxy GRPC).
The total number of unique symbols in those three indexes combined is 728 (72.8% of the Russell 1000). In other words, 28.2% don't fit any of those three disciplined investing approaches. However, when you ask for a stock to meet the criteria for all three disciplines, only 16 pass through that filter, as reasonably priced, low P/E, consistent growth stocks (as determined by the indexing firm Russell Investments).
Those 16 stocks are listed in this table in alphabetical order by symbol, along with several objective historical and subjective forecast data points:
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The criteria used by Russell Investment for each index are described by them as shown below. You may or may not find all of the criteria ideal for your purposes, but Russell asserts that they mimic the decision basis of active managers practicing within those disciplines.
Russell U.S. Large Cap Consistent Growth Index
The Russell U.S. Large Cap Consistent Growth Index targets companies with long-term earnings growth expectations that are above those of the broad market. The consistency of historical earnings growth is also a primary consideration among investors following this discipline. The emphasis on consistency of earnings also results in the index having exposure to companies with historically above-average levels of profitability and conservative balance sheets.
Eligible universe – the largest 450 stocks in the Russell 1000 Index.
Excludes those stocks in the lowest 30% of the discipline’s composite growth score. The composite growth score is defined as:
- 50% – IBES mean long-term growth Earnings per Share forecast
- 25% – Expected Earnings per Share (EPS) growth between consensus Fiscal Year 1 and Fiscal Year 2
- 25% – Five-year average annual sales growth
In instances where there are no IBES long-term growth forecasts, the composite growth score is an equal 50/50 weight between the Fiscal Year 1 to Fiscal Year 2 growth and the five-year annual sales growth.
Excludes companies in the bottom 25% of profitability. A company’s trailing one-year return on assets is used as a profitability measure.
Excludes the highest 20% of companies based on earnings variability. Earnings variability is defined as the median quarterly EPS (after extraordinary items) divided by the standard deviation of the last 20 quarters of EPS (after extraordinary items).
Excludes stocks that are among the highest 15% in dividend yield.
Excludes stocks in the bottom 35% of Price/Book ratios.
Excludes companies in the lowest 20% of Price/Sales based on annual sales.
Russell U.S. Large Cap Low P/E Index
The Russell US large cap low PE index focuses on stocks that are trading at the lower ends of the ranges of historical trading multiples and/or trading at lower multiples than are their sector peers. Some investors look at the stocks earnings-to-price, book-to-price, cash-flow-to-price or sales-to-price multiples to assess its value. Over time, these multiples tend to trade within a range. Stocks that are trading at valuation ratios below the historical averages for those of their sector peers may be viewed as attractively valued.
Eligible universe - all constituents in the Russell 1000 value index [proxy IWD] at the time of reconstitution.
Stocks must meet three of these five characteristics:
An Earnings/Price ratio a trailing basis above the stock's five-year average.
An Earnings/Price ratio on a forward basis above the stocks five-year average.
A Cash Flow/Price ratio above the stock's five-year average.
A Book/Price ratio above those of sector peers (having a Book/Price ratio in the top 50% of the Russell 1000 Value Index on a sector-neutral basis).
A Sales/Price ratio above those of sector peers (having a Sales/Price ratio in the top 50% of the Russell 1000 Value Index on a sector-neutral basis).
Russell US Large Cap Growth at a Reasonable Price (GARP) Index
The Russell US Large Cap GARP Index targets companies that are moderately priced based on their long-term forecasted earnings growth relative to their price-to-earnings ratio. This discipline also emphasizes higher-quality companies with historically stable balance sheets and consistent earnings trends. Managers following this strategy tend to prefer companies with consistent business operations that have historical moderate rates of growth. These investors also have some regard for valuation and therefore are more conscious of the price they pay for a stock.
Eligible universe the largest 800 stocks in the Russell 1000 Index
Excludes those stocks in the bottom 50% of average profitability. Profitability is defined as the average return on equity over the past five years.
Excludes those stocks that are within the top 50% of above-average earnings variability. Earnings variability is defined as the median quarterly EPS (after extraordinary items) divided by the standard deviation of the last 20 quarters of the EPS (after extraordinary items).
Excludes those stocks that are within the top 20% of Price-to-Earnings/Growth (PEG) ratio. The PEG ratio is defined as Price/Earnings based on forecasted one-year earnings divided by a stock's IBES long-term forecasted growth rate. For stocks where an IBES one-year growth rate is not available, a PEG ratio based on two-year forecasted earnings is used. Stocks with a negative PEG ratio are excluded.
Excludes stocks that are within the top 10% of Price/Earnings using FY 1 estimate.
Excludes stocks with an S&P quality rating of less than B. For those stocks that do not have an S&P quality rating, those stocks with a Debt/Capital ratio above the median are excluded.
Exclude stocks that are among the highest 5% in dividend yield.
Disclosure: QVM has positions in some of the stocks identified in this article as of its creation date (December 23, 2011).
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.