My List of Companies and Return on Equity

I spent a little bit of time filling in data points on my list. I gathered six data points:

  1. Return on Equity
  2. Trailing-twelve months earnings per share
  3. Current Price
  4. 52-week high
  5. 52-week low
  6. 5-year analyst estimate of projected growth

Return on equity is a quick measure of management effectiveness. I prefer return on invested capital, but return on equity can be found quickly on most financial websites. Trailing twelve months earnings per share will help determine some valuation metrics as will the current price. The 52-week highs and lows will give a good indication of the trading range for the companies. Finally, the 5-year analyst growth estimate lets me know what the general consensus is for the company’s longer term prospects.

Keep in mind, this is not the end of my research, it is just the beginning. I’m trying to get an idea of where to focus my time. Here are my results, sorted by return on equity.

Return on equity is a really nice measure of how a company competes. The way I think about it is that if a dollar of equity is contributed to a business (or retained), what return will that business generate. In the case of AMC Networks, $1 of equity can be converted to over $2 in a year. There are some anomalies there, of course. They are developing content to sell to cable networks, primarily. A few hit shows can produce some pretty nice returns. The business raises questions about how sustainable those returns can be. Plus, there’s cord cutting, which would also hurt that business. Analysts are expecting pretty tepid growth going forward. Then there’s Marriott. Their numbers don’t make sense do to some accounting standards. Their equity is actually negative. Real estate is depreciated, and in this case depreciated to numbers low enough that equity went negative. Market value for their hotels is, of course, much higher than the value they are carried at on their balance sheet.

Mastercard has huge returns on equity. This is due to their “toll” type moat. They are collecting small fees every time someone uses a card that says Mastercard on it. A dollar into that business returns almost $0.62. This is well more than would be needed to grow the company. Starbucks has a huge brand moat. A dollar into that business returns $0.46. That’s plenty of money to be used for more Starbucks locations. Both of these are great businesses that warrant some serious considerations.

Looking at these companies, I am planning on drawing the line just below 15%. I own both Amazon and Under Armour. I know Amazon is producing cash above and beyond reported earnings and is pretty much taking over retail as we know it. Under Armour is facing some headwinds due to the closure of Sports Authority. Once distribution gets settled, I expect their earnings to grow and ROE to grow as well.

With the line drawn there on ROE, I haven’t narrowed my list down all that much. There are plenty of strong companies at the top of my mind. They are the top of many people’s minds, which is why they are strong in the first place. I have some other metrics in mind to narrow down my focus.

Disclosure: I own shares of Starbucks, Apple, Panera, Skechers, Costco, Disney, Boston Beer, Under Armour, Amazon, Whole Foods, Berkshire Hathaway, Lexington Realty Trust, Markel, Netflix, and Tesla. I have long options on Nike.

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