Valuation Dashboard: Technology And Telecom - Update

| About: Technology Select (XLK)
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Summary

Valuation metrics in Information Technology and Telecom.

Evolution since last month.

A list of stocks cheaper than their pairs.

This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry.

Executive summary

The Computers and Peripherals industry looks undervalued and close to the baseline in quality (median ROE). Communication Equipment is overpriced regarding the Price/Earnings ratio, but all other factors are better than historical averages. Internet and Semiconductors are moderately over-priced and above the quality baseline. Telecom Services are overpriced, but the quality factor is far above the historical average. Other groups are less appealing.

Since last month:

  • P/E has improved in Internet, Software, Computers/Peripherals and deteriorated in IT Services, Communication Equipment, Electronic Equipment, Semiconductors, Wireless Telecom Services.
  • P/S is stable in Diversified Telecom Services, Communication Equipment, Software, IT Services and deteriorated elsewhere.
  • P/FCF has improved in Diversified Telecom Services, Semiconductors, is stable in Internet and deteriorated elsewhere.
  • ROE has improved in Software, Computers/Peripherals.

The SPDR Select Sector ETF (NYSEARCA:XLK) has underperformed SPY by about 1% in the last 3 months. On this period, the 5 best performing S&P 500 Tech or Telecom stocks are Akamai Technologies Inc (NASDAQ:AKAM), CSRA Inc (NYSE:CSRA), F5 Networks Inc (NASDAQ:FFIV), NVIDIA Corp (NASDAQ:NVDA), Western Digital Corp (NYSE:WDC). FFIV is approaching it January 2011 high. NVDA continues its parabolic move. It has tripled year-to-date.

Some cheap stocks relative to their industries

The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings, Price/Sales and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection.

This strategy rebalanced monthly has an annualized return about 12.76% in a 17-year simulation. The sector ETF XLK has an annualized return of only 2.83% on the same period. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

ACIW

ACI Worldwide Inc

SOFTW

ARW

Arrow Electronics Inc

ELECTREQUIP

CA

CA Inc

SOFTW

CRUS

Cirrus Logic Inc.

SEMIANDEQUIP

CVG

Convergys Corp

TECHSVCE

HPQ

HP Inc

COMPUTER

NSR

NeuStar Inc

TECHSVCE

RTEC

Rudolph Technologies Inc.

SEMIANDEQUIP

SANM

Sanmina Corp

ELECTREQUIP

SNX

SYNNEX Corp

ELECTREQUIP

Detail of Valuation and Quality indicators in Technology and Telecom on 12/8/2016

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Internet

46.11

38.33

-20.30%

3.23

2.93

-10.24%

28.06

29.72

5.59%

-18.9

-26.83

7.93

IT Services

26.01

23.34

-11.44%

1.52

1.16

-31.03%

20.32

18.68

-8.78%

7.21

2.42

4.79

Software

47.5

33.79

-40.57%

3.77

2.81

-34.16%

32.23

23.95

-34.57%

-10.39

-8.17

-2.22

Communications Equipt

32.41

28.48

-13.80%

1.47

1.61

8.70%

16.94

24.1

29.71%

-4.39

-9.61

5.22

Computers & Peripherals

22.11

24.67

10.38%

1.25

1.24

-0.81%

21.83

21.68

-0.69%

-13.17

-8.33

-4.84

Electronic Equipment

23.18

21.26

-9.03%

1.23

1.3

5.38%

25.12

21.35

-17.66%

2.04

-1.77

3.81

Semiconductors*

35.42

31.77

-11.49%

2.79

2.41

-15.77%

33.44

28.86

-15.87%

1.82

-1.34

3.16

Diversified Telecom Sces

35.1

19.95

-75.94%

1.57

1.2

-30.83%

34.8

23.83

-46.03%

-0.43

-11.97

11.54

Wireless Telecom Sces

38.97

27.57

-41.35%

1.33

1.75

24.00%

38.19

31

-23.19%

0.68

-14.25

14.93

* Averages since 2003

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors the difference to average is calculated in the direction where positive is good. For valuation ratios lower is better, for ROE higher is better. On the charts below higher is always better.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

Momentum

The next chart compares the price action of XLK with SPY in the last 3 months (chart from freestockcharts.com).

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Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long FFIV,SPY.

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.