770: Vox Screens Stocks: John & Justin pick two stocks from the Pricing Power Screener

The Vox Markets Podcast

Welcome back to our new podcast series Vox Screens Stocks featuring John Hughman, previous Editor of Investors Chronicle & now head of content at Vox Markets and the voice of Vox Justin Waite.

There are lots of ways of finding investment opportunities, but one of the most fruitful is to start your search by crunching stock market data. With thousands of listed companies, using tools to filter for certain financial characteristics can whittle the market down to a manageable number that you can use to focus your research efforts.

Each week we'll use a variety of stock screening approaches to come up with a list of stocks which fit the criteria of this week’s stock screener, then John & Justin will pick a stock from the list, explain what they like about it.

This week we are looking for companies with pricing power, which should prove more adept at maintaining their prices – or raising them – to offset the input cost increases that come with an inflationary environment, and where economic problems could put the squeeze on spending by consumers and companies.

Traditionally, pricing power has rested with those companies that sell so-called ‘non-discretionary’ items such as food – in other words, products we can’t live without. But the current economic backdrop means such rules of thumb don’t necessarily hold true right now. Unilever, for example, has struggled to maintain margins in recent years and earnings are expected to slip next year as volumes take a hit as consumers trade down to own-label products.

There’s no single metric we can use to identify such companies, but the stability of margins and earnings is a good proxy, along with a few indicators of quality. We've run our screen using the following criteria:

• Operating margin above 15%
• Positive 5-year average operating margin
• Forecast PE of less then 25
• Positive forecast EPS growth
• Positive 5-year average EPS growth
• Return on equity – a measure which demonstrates a company’s ability to generate profit from its assets - greater than 15

I’ve also included operating cash conversion in the column to show how effective a company is at turning its profits into all-important cash. A rule of thumb is that a rate above 90% is good, but all results bar one – Somero – managed a ratio above 100%.

You should also look at the numbers in the context of recent commentary from the company, particularly the latest outlook statements. Always remember, numbers alone can mislead - stock screens are a starting point for further research.
See the full screen CLICK HERE
John's Pick:

Games Workshop GAW | manufacturer and retailer of the Warhammer model miniature series

Games Workshop’s shares enjoyed a meteoric rise but have halved in the last six months or so as rising inflation has eaten away at the value of the most highly-rated shares. But that leaves the shares much more attractively priced, and while growth has moderated from the lockdown boost – and profits have been held back by higher input and distribution costs trading does appear to be holding steady, no mean feat given the economic backdrop and testament to the loyalty of its customer base. It’s invested heavily in capacity and headcount, and royalty income from licensing deals is starting to grow quickly.
ustin's Pick:

Future FUTR | a leading publisher of specialist magazines and content

Like Games Workshop, Future’s shares enjoyed a stellar run only to fall back sharply again as the market entered a downturn. But once again, that offers a much better entry point into what is rapidly becoming one of the largest specialist media companies in the world, with content that it boasts reaches 1 in 3 adults online in the UK and US. It’s been highly acquisitive, but debt remains manageable and the dealmaking has brought it scale which enables it to benefit from significant operational leverage is it continues its digital transition.