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Summary

  • I look at the holdings of the Technology SPDR and the Utilities SPDR to find the "best-of-breed" stock in each sector.
  • I combined fundamentals, corporate governance, and CEO approval to determine the best stock in each sector.
  • The two stocks I determined were "best-of-breed" have outperformed their respective sectors and have shown strong dividend growth.

This is the first article in a series of articles where I will highlight the "best-of-breed" stock for each of the nine major sectors covered by the SPDRs. For this article, I will be covering the holdings of the Technology SPDR (NYSEARCA:XLK) and the Utilities SPDR (NYSEARCA:XLU) to find the top stock in each. To aid in my search, I will be using the Finviz.com stock screener to screen for fundamentals, corporate governance data from Institutional Shareholder Services [ISS], and glassdoor.com for CEO approval ratings. The reason why I chose these three categories was that I wanted to find companies with strong fundamentals, good corporate governance, and companies with employees who believe in management.

Step #1: Finviz Screener Criteria

I downloaded the holdings for XLK and XLU into a spreadsheet, and copied them into the Finviz stock screener. I then used the following bullets below, which are the screen criteria I used to get my initial list of stocks. I found that 18 of the 71 holdings for XLK, and 2 of the 30 holdings for XLU met the criteria I set below, and those companies are listed in the table below my criteria.

  • Return on Equity: +10%
  • Return on Investment: +5%
  • EPS Growth Past 5 years: Positive
  • EPS Growth Next 5 years: Positive
  • LT Debt/Equity: <1
  • Dividend Yield: Positive
  • Operating Margin: >20%
  • Profit Margin: >10%
  • Float Short: <5%
  • Performance [1 year]: Up

Technology

Utilities

(NASDAQ:AAPL)

Apple Inc.

(NYSE:NU)

Northeast Utilities

(NASDAQ:ADI)

Analog Devices Inc.

(NYSE:PEG)

Public Service Enterprise Grp.

(NASDAQ:ALTR)

Altera Corp.

(NASDAQ:AVGO)

Avago Technologies Limited

(NASDAQ:CA)

CA Technologies

(NASDAQ:CSCO)

Cisco Systems, Inc.

(NASDAQ:INTC)

Intel Corporation

(NASDAQ:INTU)

Intuit Inc.

(NASDAQ:KLAC)

KLA-Tencor Corporation

(NASDAQ:LLTC)

Linear Technology Corp.

(NYSE:MA)

MasterCard Incorporated

(NASDAQ:MSFT)

Microsoft Corporation

(NYSE:ORCL)

Oracle Corporation

(NASDAQ:QCOM)

QUALCOMM Incorporated

(NYSE:T)

AT&T, Inc.

(NASDAQ:TXN)

Texas Instruments Inc.

(NYSE:V)

Visa, Inc.

(NASDAQ:XLNX)

Xilinx Inc.

Step #2: ISS Corporate Governance

For this step, I looked at the corporate governance score from ISS to see which companies had the lowest score. The score ISS gives is from 1-10, with 1 being the best score, which means that company has the lowest governance risk, where a score of 10 means that company has a high governance risk. The governance score for each company is listed in the table below, and the top 33% are highlighted, and those stocks will make it to my final step.

Technology

Utilities

Governance Rating

Governance Rating

CSCO

Cisco Systems, Inc.

1

PEG

Public Service Enterprise Grp.

3

ALTR

Altera Corp.

2

NU

Northeast Utilities

5

MSFT

Microsoft Corporation

2

TXN

Texas Instruments Inc.

2

V

Visa, Inc.

2

XLNX

Xilinx Inc.

2

AVGO

Avago Technologies Limited

3

T

AT&T, Inc.

3

INTC

Intel Corporation

4

AAPL

Apple Inc.

5

CA

CA Technologies

5

INTU

Intuit Inc.

5

KLAC

KLA-Tencor Corporation

6

MA

MasterCard Incorporated

6

QCOM

QUALCOMM Incorporated

7

LLTC

Linear Technology Corp.

8

ADI

Analog Devices Inc.

9

ORCL

Oracle Corporation

10

Step #3: CEO Approval

For this step, I looked at the CEO approval ratings for each of the top 6 companies from my corporate governance section above for Technology, and the results are shown in the table below. In addition, even though PEG was the stock with the best governance score above, I still included NU to show that PEG also has a higher CEO approval rating. The technology company with the highest CEO approval rating was Microsoft with 85%, and thus, is the company that I have determined is the "best-of-breed" stock for the technology sector, and for the utilities sector, Public Service Enterprise Group had the best governance score and CEO approval, with a rating of 73%.

Technology

Utilities

CEO Approval

CEO Approval

MSFT

Microsoft Corporation

85%

PEG

Public Service Enterprise Grp.

73%

CSCO

Cisco Systems, Inc.

74%

NU

Northeast Utilities

14%

TXN

Texas Instruments Inc.

71%

V

Visa, Inc.

62%

ALTR

Altera Corp.

57%

XLNX

Xilinx Inc.

30%

Performance of Microsoft and Public Services Enterprise Group

The two charts below show the performance of MSFT and PEG compared to XLK and XLU since the inception of both ETFs. As you can see, MSFT has slightly outperformed the XLK, and PEG has significantly outperformed the XLU.

Chart #1: Microsoft [Black line] vs. XLK [Blue Line]

Chart #2: Public Service Enterprise Group [Black line] vs. XLU [Blue Line]

The pair of charts below show the yearly dividend totals for MSFT and PEG, and show that each company has grown its dividend even through the financial crisis. [Dividend Data from Dividendchannel.com]

(click to enlarge)

(click to enlarge)

Closing thoughts

I believe Microsoft and Public Service Enterprise group are worth a deeper look because they met all my fundamental criteria, which I believe are important factors that make each company strong. In addition, including additional factors like corporate governance and employees' views of management, I believe when combined with strong fundamentals, is a solid method of determining stocks that are best-of-breed. In my next article, I will be covering the Consumer Staples and Consumer Discretionary sectors.

Source: Best Of Breed Part 1: Technology And Utilities