I built a screen that I would like to share that acts as a starting point in identifying quality stocks that have great historical returns on invested capital and relatively low current valuations.

The time period I used was from to , or 9 years. I used EBIT as the earnings metric, so it is not a perfect after-tax return on invested capital. I calculated invested capital two ways, one with goodwill, and one without goodwill. I defined return on invested capital as follows:.

I took the two methods for calculating returns on invested capital and then removed negative returns on invested capital for all years.

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Companies that had no reported data from the period to were also not included i. I then took an average of all of the years for both methods and gave a rank to the average returns on invested capital. A low score meant a high return on invested capital.

I then aggregated these scores, giving a weighting to the two return on invested capital methods. It's also important to note that this methodology is not perfect. For example, Apple NASDAQ: Also, companies like Boeing NYSE: BA and Lockheed Martin NYSE: LMT were excluded because they had negative returns on invested capital using the method that excludes goodwill.

I like to use this list to find quality companies that are likely to maintain a competitive advantage. However, there are still companies on this list that I believe will continue to achieve high returns on invested capital and maintain their economic moats. My favorites include, Viacom, IBM, Polaris Industries, and Lear Corporation.

These stocks have had fairly large declines for different reasons, but I think that they will be solid positions to own over the next decade. Viacom is a media company that owns Paramount Pictures, Comedy Central, MTV, CMT, BET, Spike, and Nickelodeon.

The stock has been hit hard over declining ratings which has plagued the industry to a lesser extent and a brutal legal battle over control of the company. However, I think attractive valuation levels make Viacom a compelling long at current prices. The Walt Disney Company NYSE: Scripps Networks Interactive, Inc. Regal Entertainment Group NYSE: Polaris Industries is another stock that has a low valuation with a high return on invested capital.

Polaris manufactures and sells off-road vehicles, snowmobiles, motorcycles, and on-road vehicles.

Polaris Industries operates brands such as Victory Motorcycles, Indian Motorcycles, and Polaris. The major risks to Viacom are the decline of its TV networks and chord cutting from the industry. However, consumer tastes and content can quickly change and create a tailwind for the company. In addition, there is the prospect of Viacom spinning off Paramount Pictures to further unlock value. I think the attractive valuations and strong brands will stand the test of time.

While Polaris is cyclical, the average returns on invested capital from 85 to Not to mention the company has experienced positive dividend growth for over a decade as well.

IBM, the well-known IT and services company also makes the list of high historical returns on invested capital. IBM's revenue has declined for 17 straight quarters now, but the company is poised for a turnaround. With potential for growth, strong cash flow, Warren Buffett's backing, and a swath of intellectual property, I believe IBM will have a solid future ahead of it.

Hewlett Packard Enterprise Company NYSE: Cognizant Technology Solutions Corporation NASDAQ: Finally, Lear Corporation is the last of my favorites. Lear Corporation designs, develops engineers, assembles, and supplies automotive seating, electrical distribution systems, and other systems for automotive equipment manufacturers worldwide.

Through association with the automotive industry, Lear is cyclical. That being said the company remains one of the few low cost providers of seats to the automotive industry. The company is also shareholder friendly, with executive compensation being tied to return on invested capital. IBM must be a long-term play. The company will take time for its intellectual property such as Watson to come to fruition. In the meantime investors can collect a 3. On a going-forward basis IBM should prove to be a solid pick for the long-term.

Delphi Automotive PLC NYSE: While Lear is reliant on the auto industry, a strong management team, low debt, favorable cost-leadership should provide the recipe for a company that will continue to deliver exceptional returns on invested capital. I wrote this article myself, and it expresses my own opinions.

I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. Long Ideas Short Ideas Cramer's Picks IPOs Quick Picks Sectors Editor's Picks. Headquarters located in the U.

Must have a positive return on invested capital for the past 9 years I defined return on invested capital as follows: NSR Gilead Sciences Inc. GILD Hawaiian Holdings Inc.

HA Allegiant Travel Company NASDAQ: HRB International Business Machines Corporation NYSE: SYNT Robert Half International Inc. RHI Cisco Systems, Inc. CSCO Polaris Industries Inc.

PII The Gap, Inc. RGR Best Buy Co. BBY Fossil Group, Inc. VIAB United Therapeutics Corporation NASDAQ: UTHR USANA Health Sciences Inc. USNA Tessera Technologies Inc. HSNI Grand Canyon Education, Inc. LOPE American Eagle Outfitters, Inc. LEA Rockwell Collins Inc. Average Return on Invested Capital With and Without Goodwill from to International Business Machines With Goodwill In addition, Viacom is relatively cheap when compared to its peers. The company is also relatively cheap when compared to its peers.

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Overall I think these stocks are at least worth a look. Want to share your opinion on this article? Disagree with this article? To report a factual error in this article, click here. Follow Kevin Foyteck and get email alerts. Average Return on Invested Capital With and Without Goodwill from to