John Reese is founder and CEO of Validea.com and Validea Capital Management, and portfolio manager for the Omega American & International Consensus funds. Globe Investor has a distribution agreement with Validea, a premium Canadian stock screen service. Try it.
Today I will attempt a feat that few in the investment world have dared in recent years. I will try to write a column about technology stocks without using the A-word – that is, without analyzing a certain headline-grabbing, California-based “iGiant” that rules over the tech landscape.
To be clear, the tech behemoth to which I refer is a fine firm. But my goal is to show that the tech sector is more than a one-ring circus. It's home to numerous well-run, strong performers, some of whose shares may be even more attractive than those of that well-known tech king.
Just ask Warren Buffett. Last year, Mr. Buffett's Berkshire Hathaway took a big stake in International Business Machines. Hedge fund gurus such as George Soros and David Tepper also increased their tech stock holdings in late 2011.
Many tech firms have pristine balance sheets, and are trading at bargain prices. My Guru Strategies – by-the-number stock-picking techniques based on the published approaches of Mr. Buffett and other investing greats – are now highlighting several promising buys in the sector. Let's look at a handful of stocks that are near the top of the list.
Oracle Corp. : My Buffett-based model likes IBM, but it really likes this California-based hardware and software giant. The strategy looks for firms with lengthy histories of earnings growth, manageable debt, and high returns on equity (a sign of the “durable competitive advantage” Mr. Buffett is known to seek). Oracle has upped its earnings per share in each year of the past decade; it could pay off all of its $14.8-billion (U.S.) in debt in less than two years if need be, given its $9.7-billion in annual earnings; and it has averaged a 26.2-per-cent return on equity over the past decade – all great signs.
CGI Group Inc. : Montreal-based CGI, which provides IT services to clients across the globe, gets strong interest from my Peter Lynch- and James O'Shaughnessy-based models. The Lynch strategy considers it a “fast-grower” – Mr. Lynch's favourite type of investment – thanks to its impressive 25.7-per-cent long-term growth in earnings per share.
Mr. Lynch famously used the P/E/G ratio to find bargain-priced growth stocks. It divides a stock’s price-to-earnings ratio (P/E) by the growth rate of earnings. When we divide CGI's 14.3 P/E ratio by its long-term growth rate, we get a P/E/G of 0.56. That comes in below this model's 1.0 upper limit, a sign the stock is a bargain.
My O'Shaughnessy-based growth stock model, meanwhile, looks for firms that have upped earnings per share in each year of the past five-year period, which CGI has done. It also looks for a key combination of variables: a solid relative strength rating, which is a sign the market is embracing the stock, and a low price/sales ratio, which is a sign it hasn't gotten too pricey. With an RS of 68 and a P/S ratio of 1.2, CGI passes muster.
Microsoft Corp. : Bill Gates' software behemoth isn't as sexy as that other tech giant that I promised not to name, but my Lynch-based model thinks its shares are more attractive. The model considers Microsoft to be what it calls a “stalwart” because of its double-digit growth rate and high sales ($73-billion over the past year). It’s the kind of large, steady firm that Mr. Lynch found offered protection during downturns or recessions.
For stalwarts, Mr. Lynch adjusted how he calculated the “growth” portion of the P/E/G equation to include yield, since such companies often pay solid dividends. With its 11.6 P/E, 2.5-per-cent dividend yield, and 15.9-per-cent growth rate, Microsoft sports a 0.63 yield-adjusted P/E/G, easily coming in under the model's 1.0 upper limit.
Tech Data Corp. : With more than $26-billion in sales over the past year, this Florida-based firm is one of the largest wholesale IT distributors in the world. Tech Data gets strong interest from my Lynch-based model, which likes its 26.3-per-cent growth in earnings per share over the past few years and its 11.7 P/E, which make for a stellar 0.45 P/E/G ratio.
Disclosure: I own shares of Oracle and Tech Data