Technology And Communication Dashboard - Update

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About: Commun Svc SS Shs (XLC), XLK, Includes: ADS, ADSK, AMAT, AMCX, AMD, CTXS, DIS, FTNT, IBM, LRCX, MU, NTAP, QNST, SGH, STX, XLY
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. This “Tech & Com” 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 it difficult to set historical baselines for our metrics.

Executive summary

Computers/peripherals and semiconductors are underpriced relative to their historical averages in price/earnings ratio, but moderately overvalued taking into account 3 valuation ratios. Electronic equipment is not far behind. Other industries are more overpriced. Software, entertainment and IT services are the worst ones in this regard, with all valuation metrics far on the bad side of their historical baselines. All industries except software and entertainment are above their historical baseline in profitability measured by return on equity.

Since last month:

  • P/E has improved in wireless telecom, is stable in semiconductors and electronic equipment, and deteriorated elsewhere.

  • P/S has improved in wireless telecom and deteriorated elsewhere.

  • P/FCF has improved in telecom and entertainment, is stable in electronic equipment, software and IT services, and deteriorated elsewhere.

  • ROE has deteriorated in entertainment, software and IT services, and is stable elsewhere.

  • The Technology Select Sector SPDR ETF (XLK) and the Communication Services Select Sector SPDR ETF (XLC) have outperformed the SPDR S&P 500 ETF by 2.5 and 1.1 percentage points. XLK reached a new all-time high last week. So did the consumer discretionary index (XLY).

  • On this period, the 5 best performing S&P 500 technology or communication stocks are Autodesk Inc. (ADSK), Advanced Micro Devices Inc. (AMD), Walt Disney Co. (DIS), Fortinet Inc. (FTNT) and NetApp Inc. (NTAP).

Some cheap stocks in their industries

The stocks listed below are in the S&P 1500 index and 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.

STX

Seagate Technology Plc

COMPUTER

AMAT

Applied Materials Inc.

SEMIANDEQUIP

LRCX

Lam Research Corp.

SEMIANDEQUIP

MU

Micron Technology Inc.

SEMIANDEQUIP

SGH

SMART Global Holdings Inc.

SEMIANDEQUIP

CTXS

Citrix Systems Inc.

SOFTW

ADS

Alliance Data Systems Corp.

TECHSVCE

IBM

International Business Machines Corp.

TECHSVCE

AMCX

AMC Networks Inc.

MEDIA

QNST

QuinStreet Inc.

SOCIAL

Detail of valuation and quality indicators in technology and telecommunication on 4/16/2019

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

15.81

24.67

35.93%

1.47

1.24

-18.15%

31.90

21.68

-47.13%

1.17

-8.33

9.50

Wireless Telecom

39.30

27.57

-42.55%

1.39

1.75

20.81%

27.31

31

11.90%

3.94

-14.25

18.19

Communication Equipt

39.04

28.48

-37.08%

1.74

1.61

-7.81%

28.40

24.1

-17.86%

-1.76

-9.61

7.85

Entertainment

42.34

23.46

-80.46%

3.51

1.54

-127.61%

33.10

19.9

-66.32%

-7.96

-3.21

-4.75

Electronic Equipment

22.98

21.26

-8.09%

1.53

1.3

-17.46%

30.26

21.35

-41.73%

2.29

-1.77

4.06

Software

69.49

33.79

-105.66%

6.11

2.81

-117.58%

60.10

23.95

-150.92%

-19.24

-8.17

-11.07

Diversified Telecom

27.64

19.95

-38.55%

1.69

1.2

-41.18%

24.05

23.83

-0.92%

-6.11

-11.97

5.86

Semiconductors*

25.40

31.77

20.05%

3.13

2.41

-29.71%

27.30

28.86

5.41%

6.25

-1.34

7.59

IT Services

36.06

24.11

-49.57%

2.84

1.18

-140.62%

28.42

20.23

-40.47%

8.40

2.86

5.54

* 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 and XLC with the benchmark in 1 trailing month.

Chart by TradingView

Disclosure: I am/we are long CTXS,LRCX,STX. 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.