US stocks - top 10 prospects (December 2021)

Wall Street earnings season for Q3 2021 is over already and investors have a full picture of how US companies performed in the July-September period. However, screening through financial reports from thousands of companies is not an easy task. Luckily, our S&P 500 stock picking model is there for you! Take a look at the most recent set of stocks chosen by our model after Q3 earnings season!

Stock Picking Model 

We have analyzed financial data for over 700 companies that were members of the S&P 500 index since 1990. Goal was to determine a set of features that allows us to pick stocks that will turn out to be winners over the next 5 years. The idea is to pick 10 stocks each quarter for a 5-year holding period. We have found 10 features that were key for S&P future 500 winners. A look at those ratios shows that they are common for so-called growth stocks.

• High Price/Book Value ratio

• High Relative Price/Book Value ratio

• High Return on Capital

• High 4-quarter revenue growth rate

• High 3-year revenue growth

• Low dividend yield

• Low dividend payout ratio

• Low share of short-term debt

• Low net debt to equity ratio

• High cash coverage ratio

Model results so far

Our model is based on financial data from companies therefore it is best to run it 2 months after the end of the quarter as most of the S&P 500 companies have reported quarterly results by then. We have run our model at the beginning of June 2021 and then again at the beginning of September 2021. Results for the June-November period look promising with our portfolio generating an over 30% rate of return, compared to around 8% gained by the S&P 500 index. However, it should be noted that stocks chosen by our model in following quarters are not unique - out of 10 stocks chosen in June 2021, 6 were also chosen by the model in September 2021. Nevertheless, keep in mind that stocks are chosen for a 5-year holding period so repeating part of picks in the following period suggests that they still have features of winners.

Results of S&P 500 and a portfolio chosen by our model since the beginning of June 2021. Source of data: Refinitiv

Stocks chosen at the beginning of December 2021

Looking at stock picks chosen by the model at the beginning of December, we do not see a big shuffle compared to picks from September. 7 out of 10 picks were repeats from September. Moreover, 6 out of 10 picks were also repeats from June, showing that those stocks continue to have features of winners. Let's take a brief look at companies that were selected as potential winners at the beginning of December 2021.

Fortinet - Cybersecurity

Fortinet (FTNT.US) is a cybersecurity company. It is one of the leaders within the industry and provides both cybersecurity software and cybersecurity hardware. Demand for Fortinet's products spiked during the pandemic as more employees were forced to work from home rather than from office and companies were in need to set up new cybersecurity features. Company reported a 33% YoY jump in Q3 revenue while net income increased 14%. Fortinet was also chosen by our stock picking model in June and September 2021.

Quarterly sales and P/S ratio for Fortinet. Source: Bloomberg

AMD - Graphics Processors and Chips

Advanced Micro Devices (AMD.US) is a company producing electronic components. Among its main products one can find advanced microprocessors. One of AMD's key rivals is well-known US tech company - Intel. AMD's revenue jumped over 50% in the Q3 2021 compared to Q3 2020 and reached $4.31 billion. EPS increased from $0.34 to $0.0.78. Company's is a regular on our model's stock pick list as it was also chosen in June and September 2021.

Quarterly sales and P/S ratio for AMD. Source: Bloomberg

Apple - Software and Computer Hardware

Apple (AAPL.US) is a company that needs no introduction. It's cutting edge smartphones and other hardware products made it the biggest company in the world in terms of market capitalization. Company's revenue has been increasing slowly but steadily over the past decade before spiking 33% in fiscal-2021 (ended on September 25, 2021). Company's net profit jumped over 60% to almost $94.5 billion. Apple constantly tries to stay ahead of its competitors by investing large amounts of money in new R&D spending. Apple was also chosen by our stock picking model in June and September 2021.

Quarterly sales and P/S ratio for Apple. Source: Bloomberg

Nvidia - Graphics Processors and Chips

Nvidia (NVDA.US) is a company designing and manufacturing computer parts. The company is best known for its graphics processing units that are appreciated by gamers as well as cryptocurrency mining equipment manufacturers. Nvidia has also begun offering cloud gaming services via its Geforce Now brand. Nvidia reported a 50% YoY jump in Q3 revenue, to $7.1 billion, while EPS jumped 70% YoY, to $1.01. Just as AMD, NVIDIA was also chosen by our stock picking model in June and September 2021.

Quarterly sales and P/S ratio for Nvidia. Source: Bloomberg

IDEXX Laboratories - Veterinary software and equipment

IDEXX Laboratories (IDXX.US)  is the first one of newcomers on the list. Company provides diagnostic equipment and information systems to veterinary businesses. Covid-19 pandemic turned out to be a profitable period for IDEXX Laboratories as feelings of loneliness during lockdowns encouraged people to adopt more pets. Company expects the favourable business conditions to persist in 2021 and expects annual revenue to climb 18% YoY to a new record of $3.2 billion. EPS growth is seen at 22-24% this year. 

Quarterly sales and P/S ratio for IDEXX Laboratories. Source: Bloomberg

Autodesk - Software

Autodesk (ADSK.DE) is a company designing and drafting software for architects and engineers. Company reported a 18% year-over-year increase in revenue in Q3 2021, and for the third time in history its quarterly sales topped $1 billion. However, Q3 EPS dropped from $0.62 to $0.57. Sales results matched investors' expectations but net income turned out to be lower than forecasted. Autodesk was also chosen by our stock picking model in June and September 2021.

Quarterly sales and P/S ratio for Autodesk. Source: Bloomberg

Mettler-Toledo International - Scales and Measuring Equipment

Mettler-Toledo International (MTD.US) is the second stock to debut on a pick list of our model in December 2021. Company is a manufacturer of scales and measuring equipment that is used in the food sector and laboratories. Apart from that, Mettler-Toledo also supplies measurement technology for companies. Stock is trading 40% year-to-date higher and has recently announced that it will buy back $1 billion of its own stock in 2022. Company is expecting profit to increase around 34% this year while sales are forecast to be 8% YoY higher.

Quarterly sales and P/S ratio for  Mettler-Toledo International. Source: Bloomberg

Adobe - Software

Adobe (ADBE.DE) is a company developing graphics software. In its portfolio of flagship products we can find software like Adobe Photoshop, Adobe Illustrator or Adobe Premiere. Revenue of Adobe jumped 22% in Q3 2021 compared to Q2 2020. EPS was 30% YoY higher at  $2.50. Company announced that it expects revenue in fiscal 2022 to reach $17.90 billion, or 13% above fiscal-2021. Adobe was also chosen by our stock picking model in June and September 2021.

Quarterly sales and P/S ratio for Adobe. Source: Bloomberg

S&P Global - Financial Information

S&P Global (SPGI.US)  is the third of newcomers on our stock pick list for December 2021. Company focuses on financial information and analytics. However, it is best known as an index provider and rating company. S&P Global is an interesting pick as our model favours stocks with low dividend yield and low payout ratio. Meanwhile S&P Global has been increasing its dividend in each of the past 48 years, making it more of a value stock than a growth stock. Nevertheless, the company has gained almost 50% year-to-date, a much bigger gain than in the case of S&P 500. Company has managed to boost its revenue by over 100% over the previous decade and outlook remains bright after the US watchdog approved a proposed $39 billion takeover of Markit IHS by S&P Global.

Quarterly sales and P/S ratio for S&P Global. Source: Bloomberg

Paycom Software - Payroll and Human Resources Software

Paycom Software (PAYC.US) is another company that was chosen by our model at the beginning of December 2021 that was also chosen in September 2021. Its software supports employers in terms of hiring process, talent management or paying employees accurately and in a timely manner. Company reported a 30% year-over-year jump in Q3 revenue and a 10% year-over-year increase in Q32 EPS, to $0.52. Both Q3 earnings and sales results were better than expected by analysts.

Quarterly sales and P/S ratio for Paycom Software. Source: Bloomberg