Technology And Communication Dashboard - Update

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About: Commun Svc SS Shs (XLC), XLK, Includes: ADS, AMAT, AMCX, BR, CTXS, GPN, IBM, LRCX, MU, QCOM, QNST, SGH, STX, TTWO, TWTR
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 wireless telecom are underpriced, combining 3 valuation ratios relative to their historical averages. Semiconductors look close to fair price, and electronic equipment is a bit overpriced. Other industries are significantly overvalued. Software and entertainment are the less attractive ones in this regard, with all valuation metrics and profitability looking worse than their historical baselines. IT services are not much better in valuation, but at least, they have a positive return on equity.

Since last month:

  • P/E has improved in wireless telecom, entertainment, electronic equipment, and software, and deteriorated in IT services, diversified telecom, and computers/peripherals.
  • P/S has improved in computers/peripherals, entertainment, communication equipment, software, and IT services, and deteriorated in telecom.
  • P/FCF has improved in computers/peripherals, wireless telecom, communication equipment, electronic equipment, and entertainment.
  • ROE has improved in electronic equipment, and software, and deteriorated in computers/peripherals, entertainment, and IT services.
  • The SPDR Select Sector ETF in communication (XLC) has outperformed the SPDR S&P 500 ETF by about 1.5 percentage points. The technology ETF (XLK) has lagged it by less than 1 percentage point.
  • On this period, the 5 best performing S&P 500 technology or communication stocks are Broadridge Financial Solutions Inc. (BR), Global Payments Inc. (GPN), Qualcomm Inc. (QCOM), Take-Two Interactive Software Inc. (TTWO), and Twitter Inc. (TWTR).

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. The list was published for subscribers at the beginning of the month based on data available at this time. 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

Details of valuation and quality indicators in technology and telecommunication on 5/16/2019

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

16.84

24.67

31.76%

1.41

1.24

-13.70%

28.62

21.68

-32.02%

-0.82

-8.33

7.51

Wireless Telecom

24.83

27.57

9.93%

1.59

1.75

9.21%

22.49

31

27.45%

3.11

-14.25

17.36

Communication Equipment

38.17

28.48

-34.01%

1.65

1.61

-2.43%

24.47

24.1

-1.52%

-2.07

-9.61

7.54

Entertainment

40.43

23.46

-72.34%

3.19

1.54

-107.21%

26.54

19.9

-33.39%

-10.76

-3.21

-7.55

Electronic Equipment

21.57

21.26

-1.45%

1.51

1.3

-15.92%

34.65

21.35

-62.29%

4.25

-1.77

6.02

Software

64.22

33.79

-90.04%

6.01

2.81

-113.79%

59.09

23.95

-146.73%

-15.16

-8.17

-6.99

Diversified Telecom

30.54

19.95

-53.07%

1.85

1.2

-54.51%

24.02

23.83

-0.79%

-6.60

-11.97

5.37

Semiconductors*

26.09

31.77

17.88%

3.14

2.41

-30.42%

27.33

28.86

5.31%

5.38

-1.34

6.72

IT Services

38.34

24.11

-59.00%

2.74

1.18

-132.54%

27.67

20.23

-36.79%

6.43

2.86

3.57

* 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 ADS,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.