It’s earnings season. Why Netflix and Nvidia have been crossed off this firm’s list for quality stocks.

The first comes in to play right now — don’t focus on earnings too much. Earnings per share, they say, provide an excessively short-term of the financial health. Instead, they prefer focusing on return on invested capital and return on equity (ROE).

Jensen says it will only invest in companies that have achieved a 15% return on equity, every year, for at least 10 consecutive years. “The figure can be inflated when companies carry a lot of debt in their capital structure and can rise and fall over the sales cycle even if the fortunes of the business itself are constant. Over a 10-year period, however, we believe ROE paints a more complete picture, providing a more complete assessment of a company’s long-term financial prospects over at least one market cycle,” they say.

Netflix
NFLX,
-1.53%,
which reports results on Wednesday, doesn’t cut the mustard. “It was relatively easy for media companies with enormous libraries of content to copy its business model, calling into question its long-term competitive advantage. For us, until it achieves 10 consecutive years of 15% ROE the jury will be out on its ability to compete with rivals,” they say.

Another company the Jensen team crossed off is Zoom Video Communications
ZM,
-1.13%.
“A company with the right technology at the right time, its stock price reflected its fortunes during the COVID-19 pandemic, when it established itself as a leading provider of digital meeting spaces. However, with companies like Microsoft and Google offering similar products, it isn’t clear what enduring competitive advantages Zoom possesses,” they say.

Which companies do? The Jensen team highlight Broadridge
BR,
-1.95%,
an investor communications and trade processing company that it owns. “Broadridge has unrivaled access to investors, processing around 80% of proxy votes in North America. This competitive advantage would be difficult for a challenger to overcome. The company is also relatively unaffected by market cycles, as its 98% client retention rate generates strong recurring revenues,” they say. Another company highlighted is Marsh McLennan
MMC,
+0.01%,
the insurance broker and risk management company.

MarketWatch ran a screen of S&P 500 and Nasdaq 100 members, in FactSet, that cleared the return on common equity bar of at least 15% for the last ten years. Including Broadridge and Marsh McLennan, there were 79 companies that met that criteria, led in sales by Apple
AAPL,
-1.03%,
which Jensen says it owns. Interestingly, Jensen does own Microsoft which didn’t meet this screen, though it should be noted Jensen’s 15% ROE number does exclude non-recurring items.

The firm discussed the Magnificent Seven. “All seven of these stocks were down over the course of 2022, but rather than selling on the panic, we held Microsoft
MSFT,
-1.04%
and Apple
AAPL,
-1.03%
because we believed in their long-term prospects. By the end of June 2023 both stocks were trading above their price at the start of 2022. All the other stocks in the group, except Nvidia, remained below where they were at the beginning of 2022. We believe this vindicates our belief in the resilience of companies that meet our investment criteria,” they say.

Granted, that means it missed out on Nvidia’s
NVDA,
-3.16%
stellar returns. “Nvidia has benefited from the considerable hype around artificial intelligence this year, and an investor skillful or lucky enough to buy that stock at the start of 2023 will have seen the position deliver a return of 194% through the end of May. Some investors will certainly have made a lot of money doing that, but it is difficult to build a strategy out of such trades,” they add.

The market

After a solid 0.5% gain last week for the S&P 500
SPX,
U.S. stock futures
ES00,
+0.40%

NQ00,
+0.22%
were mixed, as the 10-year Treasury
BX:TMUBMUSD10Y
yield rose by another 6 basis points. Polish assets rose after pro-EU parties appeared to have won Sunday’s election.

The buzz

Israel and Hamas both denied they agreed to a humanitarian cease fire, which does show there are diplomatic efforts in the works but also points to their limited efficiacy.

The economics calendar for Monday features the Empire State manufacturing index at 8:30 a.m. Eastern., ahead of Thursday’s much-awaited speech from Fed Chair Jerome Powell.

Pfizer shares
PFE,
-2.46%
slumped after the drug giant cut its sales outlook, citing declining takeup of the COVID vaccine it makes with BioNTech
BNTX,
-4.89%.

Charles Schwab & Co.
SCHW,
-0.35%,
whose shares have dropped 38% this year on worries over deposit outflows, reports results ahead of the open, in a week that will feature more bank earnings as well as Netflix and Tesla results.

Debt-ridden drugstore chain Rite Aid
RAD,
-16.81%
filed for bankruptcy protection.

Manchester United stock
MANU,
+1.22%
dropped in premarket after Qatari banker Sheikh Jassim withdrew his bid, clearing the way for a partial stake buy from British billionaire Jim Ratcliffe.

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