What are we looking for?
Efficient wealth creators in the information technology sector.
The screen
We searched for IT companies in the S&P 500 index and S&P/TSX composite index and looked at the following metrics:
– Highest economic value added (EVA) per share. EVA is a measure of true economic profit created by a company; it is calculated by subtracting capital charges from the net operating profit after tax. EVA per share shows us, on a relative scale, how effective a company is in creating value for its shareholders. We filtered for a minimum of $1.50 EVA per share;
– Economic performance index (EPI), which is return on capital divided by cost of capital (a ratio above 1.0 indicates wealth creation);
– The five-year average return on capital;
– A price/intrinsic value ratio smaller than 2.0.
– Future growth value divided by market value of total capital (FGV/MV), a ratio that helps determine whether the stock is trading at a discount or premium to the current value of the company's operations.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
IBM Corp. and Constellation Software Inc. each produce more than twice the EVA per share than other companies on the list. Constellation has also generated the highest five-year average return on capital, and the second-highest EPI (behind Avago Technologies), demonstrating very productive economic performance. IBM currently offers the largest discount to its current operating value (FGV/MV). Both are trading at a discount to their intrinsic value (price/IV ratio less than 1.0).
Google Inc. and Apple Inc. also generate strong EVA per share, though both are trading at premiums to their operating value. This shows that the market has priced in higher growth expectations for these companies.
CGI Group Inc. creates EVA per share at a strong but more modest rate, has a good EPI and is priced at a discount to both its operating value and its intrinsic value.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Nick Winch is an account manager for StockPointer at Inovestor Inc.