Technology And Telecom Dashboard - Update

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About: Technology Select Sector SPDR ETF (XLK), Includes: ACLS, ADS, ADSK, AMAT, AMD, CIEN, CTL, IBM, IT, LRCX, MU, QQQ, SABR, SAIC, SNPS, STX
by: Fred Piard
Summary

Valuation metrics in information technology and telecommunication.

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.

Executive summary

Combining the 3 valuation metrics reported hereafter, wireless telecom services and semiconductors look the most attractive groups in IT and telecommunication. They are also above their baselines in profitability measured in median ROE. Communication equipment is moderately overvalued. Diversified telecom services have mixed ratios: the price/earnings and price/free cash flow factors are fair, the profitability is far above the historical average, but the price/sales looks bad. Other technology and telecommunication industries are overvalued. The most overpriced group is software. All industries except software are above their historical average in profitability.

Anyway, I think systemic risk is more important than market valuation to manage a portfolio (click here to learn more about it).

Since last month:

  • P/E has improved in software, computers/peripherals and semiconductors, and deteriorated elsewhere.

  • P/S is stable except a moderate deterioration in internet and software.

  • P/FCF has improved in semiconductors and diversified telecom services, and deteriorated in IT services, software, computers/peripherals, electronic equipment and wireless telecom services.

  • ROE has improved in IT services, computers/peripherals, electronic equipment and telecom, and deteriorated in internet and software.

  • The Technology Select Sector SPDR ETF (XLK) has lagged the SPDR S&P 500 ETF by about 1%.

  • On this period, the 5 best performing S&P 500 technology or telecommunication stocks are Autodesk Inc. (ADSK), Advanced Micro Devices Inc. (AMD), CenturyLink Inc. (CTL), Gartner Inc. (IT), and Synopsys Inc. (SNPS).

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. I update every month several lists like this in various sectors. Quantitative Risk & Value Members have an early access to the stock lists before they are published in free articles. Click here to read about performances. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

CIEN

Ciena Corp.

COMMEQUIP

STX

Seagate Technology Plc

COMPUTER

ACLS

Axcelis Technologies Inc.

SEMIANDEQUIP

AMAT

Applied Materials Inc.

SEMIANDEQUIP

LRCX

Lam Research Corp.

SEMIANDEQUIP

MU

Micron Technology Inc.

SEMIANDEQUIP

ADS

Alliance Data Systems Corp.

TECHSVCE

IBM

International Business Machines Corp.

TECHSVCE

SABR

Sabre Corp.

TECHSVCE

SAIC

Science Applications International Corp.

TECHSVCE

Detail of valuation and quality indicators in technology and telecommunication on 9/10/2018

I take 4 aggregate industry factors: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF) and 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

54.89

38.33

-43.20%

5.60

2.93

-91.20%

49.65

29.72

-67.06%

-23.99

-26.83

2.84

IT Services

29.00

23.34

-24.23%

2.11

1.16

-82.22%

29.42

18.68

-57.51%

13.66

2.42

11.24

Software

60.67

33.79

-79.55%

6.01

2.81

-113.81%

49.48

23.95

-106.60%

-11.10

-8.17

-2.93

Communications Equipt

34.57

28.48

-21.40%

1.79

1.61

-11.35%

29.79

24.1

-23.62%

-1.26

-9.61

8.35

Computers/Peripherals

20.93

24.67

15.15%

1.68

1.24

-35.58%

35.80

21.68

-65.15%

-0.79

-8.33

7.54

Electronic Equipment

34.17

21.26

-60.73%

1.56

1.3

-19.82%

36.61

21.35

-71.46%

1.13

-1.77

2.90

Semiconductors*

28.61

31.77

9.95%

3.00

2.41

-24.51%

23.79

28.86

17.56%

5.62

-1.34

6.96

Diversified Telecom Sces

19.49

19.95

2.32%

2.10

1.2

-74.92%

24.92

23.83

-4.58%

1.72

-11.97

13.69

Wireless Telecom Sces

32.81

27.57

-19.01%

1.42

1.75

18.61%

36.08

31

-16.40%

10.29

-14.25

24.54

* 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 the benchmark in the last month.

Chart by TradingView

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Disclosure: I am/we are long QQQ. 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.