Valuation Dashboard: Technology And Telecom - Update

| About: Technology Select (XLK)

Summary

Valuation metrics in Information Technology and Telecom.

Evolution since last month.

A list of stocks looking cheap in their industries.

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, and gives a list of 10 stocks. I update every month 8 lists like this one covering all sectors (some sectors are grouped). The 8 lists together have returned about 25% in 2016. If you want to stay informed of updates, click "Follow" at the top of this page. My Marketplace Subscribers have an early access to the stock lists before they are published in free-access articles.

Executive summary

Communication Equipment and Semiconductors look close to fair value. The hardware industry is undervalued regarding price/earnings and a bit overpriced for 2 other valuation factors. Internet is moderately over-priced. Other industries are less attractive. The most overpriced is Diversified Telecom Services. All industries in the sector are above or close to the historical average in profitability (measured by ROE).

Since last month:

  • P/E has improved in Semiconductors, Telecom, is stable in Electronic and Communication Equipment, and deteriorated elsewhere.
  • P/S has improved in Internet, Integrated Telecom Services and deteriorated in Software.
  • P/FCF has improved in Internet, Electronic Equipment, Semiconductors, Telecom and is quite stable elsewhere.
  • ROE has deteriorated in Internet, Software, Hardware, Integrated Telecom Services and is stable elsewhere.
  • The SPDR Select Sector ETF (XLK) had almost the same return as the SPDR S&P 500 ETF (SPY).
  • On this period, the 5 best performing S&P 500 Tech or Telecom stocks are Analog Devices Inc. (NASDAQ:ADI), Activision Blizzard Inc (NASDAQ:ATVI), Cognizant Technology Solutions Corp (NASDAQ:CTSH), HP Inc (NYSE:HPQ), NetApp Inc (NASDAQ:NTAP).

Some cheap stocks in 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.

PLUS

ePlus Inc

ELECTREQUIP

SANM

Sanmina Corp

ELECTREQUIP

CRUS

Cirrus Logic Inc.

SEMIANDEQUIP

INTC

Intel Corp

SEMIANDEQUIP

RTEC

Rudolph Technologies Inc.

SEMIANDEQUIP

ACIW

ACI Worldwide Inc

SOFTW

CA

CA Inc

SOFTW

CTXS

Citrix Systems Inc.

SOFTW

CSRA

CSRA Inc

TECHSVCE

NSR

NeuStar Inc

TECHSVCE

Detail of Valuation and Quality indicators in Technology and Telecom on 3/8/2017

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

47.01

38.33

-22.65%

3.33

2.93

-13.65%

28.05

29.72

5.62%

-23.02

-26.83

3.81

IT Services

29.01

23.34

-24.29%

1.6

1.16

-37.93%

22.16

18.68

-18.63%

7.01

2.42

4.59

Software

50.22

33.79

-48.62%

3.97

2.81

-41.28%

34.38

23.95

-43.55%

-8.44

-8.17

-0.27

Communications Equipt

30.89

28.48

-8.46%

1.65

1.61

-2.48%

22.52

24.1

6.56%

-2.95

-9.61

6.66

Hardware/Peripherals

21.67

24.67

12.16%

1.52

1.24

-22.58%

22.45

21.68

-3.55%

-13.7

-8.33

-5.37

Electronic Equipment

27.63

21.26

-29.96%

1.44

1.3

-10.77%

26.56

21.35

-24.40%

1.69

-1.77

3.46

Semiconductors*

34.62

31.77

-8.97%

3.02

2.41

-25.31%

28.22

28.86

2.22%

2.21

-1.34

3.55

Integrated Telecom Sces

25.83

19.95

-29.47%

1.45

1.2

-20.83%

26.56

23.83

-11.46%

-9.85

-11.97

2.12

Wireless Telecom Sces

43.72

27.57

-58.58%

1.43

1.75

18.29%

30.38

31

2.00%

-0.28

-14.25

13.97

* 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).

If you want to stay informed of my updates on this topic and other articles, click the "Follow" tab at the top of this article.

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 SPY,CTXS.

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.

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