Technology And Communication Dashboard - Update

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About: Technology Select Sector SPDR ETF (XLK), Includes: ADS, AMAT, AMCX, CIEN, CMCSA, ESIO, MU, RHT, SABR, SAIC, STX, TGNA, TWTR, XLC, XLNX, XRX
by: Fred Piard

Summary

Valuation metrics in information technology and communication services.

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

Semiconductors and wireless telecom services have 2 valuation metrics out of 3 pointing to underpricing relative to their own historical averages. Moreover, their profitability measured in ROE is above the historical baseline. Combining the 3 valuation ratios reported here, computers/peripherals and communication equipment look moderately overpriced and their profitability is also better than the baseline. Other industries listed in the dashboard look overvalued. Software and entertainment are the worst-looking ones.

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

This dashboard has been reshuffled after GICS structure changes in September 2018. Two industries are not in the table: media (GICS code 502010) and interactive media and services (GICS code 502030). The moving parts in these industries make difficult to set historical baselines for our metrics.

Since last month:

  • P/E has improved in all industries.

  • P/S has improved in all industries, except in wireless telecom where it is stable.

  • P/FCF has improved in all industries, except in wireless telecom.

  • ROE has improved in wireless telecom, diversified telecom, IT services, and deteriorated in entertainment.

  • The SPDR Select Sector ETF in technology (XLK) is lagging the SPDR S&P 500 ETF by 1.4% and the communication ETF (XLC) is ahead of the benchmark by 0.6%.

  • On this period, the 5 best performing S&P 500 technology or communication stocks are Comcast Corp. (CMCSA), Red Hat, Inc. (RHT), Twitter, Inc. (TWTR), Xilinx, Inc. (XLNX), and Xerox Corp. (XRX).

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. Quantitative Risk & Value Members have an early access to the stock lists before they are published in free articles. 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

ESIO

Electro Scientific Industries Inc.

ELECTREQUIP

AMAT

Applied Materials Inc.

SEMIANDEQUIP

MU

Micron Technology Inc.

SEMIANDEQUIP

ADS

Alliance Data Systems Corp.

TECHSVCE

SABR

Sabre Corp.

TECHSVCE

SAIC

Science Applications International Corp.

TECHSVCE

AMCX

AMC Networks Inc.

MEDIA

TGNA

TEGNA Inc.

MEDIA

Detail of valuation and quality indicators in technology and telecommunication on 11/5/2018

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

Computers/Peripherals

18.46

24.67

25.16%

1.36

1.24

-9.43%

30.36

21.68

-40.01%

-0.33

-8.33

8.00

Wireless Telecom

19.17

27.57

30.47%

1.43

1.75

18.47%

47.39

31

-52.86%

11.84

-14.25

26.09

Communication Equipt

31.34

28.48

-10.05%

1.69

1.61

-4.81%

29.29

24.1

-21.52%

-0.97

-9.61

8.64

Entertainment

35.36

23.46

-50.73%

3.15

1.54

-104.35%

32.49

19.9

-63.28%

-19.28

-3.21

-16.07

Electronic Equipment

30.13

21.26

-41.71%

1.41

1.3

-8.82%

31.28

21.35

-46.50%

1.19

-1.77

2.96

Software

56.22

33.79

-66.39%

5.30

2.81

-88.44%

48.23

23.95

-101.38%

-18.46

-8.17

-10.29

Diversified Telecom

17.96

19.95

9.98%

2.04

1.2

-70.07%

28.01

23.83

-17.56%

1.72

-11.97

13.69

Semiconductors*

24.33

31.77

23.42%

2.67

2.41

-10.73%

22.89

28.86

20.69%

5.63

-1.34

6.97

IT Services

28.05

24.11

-16.35%

2.44

1.18

-106.83%

28.05

20.23

-38.68%

10.83

2.86

7.97

* 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 and XLC with the benchmark in 1 trailing month.

Chart by TradingView

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Disclosure: I am/we are long ADS, MU.

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.