The U.S. technology sector has been delivering gains for the better part of two years. That leaves many investors with the sense that the easy money has been made and future profits will come from picking specific stocks rather than following the entire industry.
In this screen we have collected data that can be used to assess the strength of large players in the tech space. It lists 25 stocks traded in the United States with market values greater than $1-billion (U.S.). To filter down the initial list of more than 300 stocks, we set a number of criteria. Each company had to be profitable. Those listed on the screen have posted net income of $100-million or more over the last year. We also wanted to see revenue growth, good cash flow and evidence of good capital management. Only companies posting annual growth of 10 per cent or more, cash flow of $500-million or more and research and development spending that exceeds 10 per cent of sales made the list.
The information comes from StarMine, a Thomson Reuters service that ranks analysts and gathers earnings estimate data to which it applies proprietary research to detect momentum and other factors.
The first such measurement is called StarMine SmartEstimate, which is a proprietary blend of analysts’ estimates that aims to more accurately forecast upcoming results than the consensus estimate. It gives a weighting to each analyst’s estimate according to his or her past accuracy. SmartEstimate also gives greater emphasis to the most timely forecasts and less to those that have not been updated for a lengthy period.
Our screen lists the degree of change, up or down, in the SmartEstimate for each company, measured as a percentage of the original forecast. This column gives an idea of which way momentum is going for the stock.
The percentage difference between the SmartEstimate and the consensus estimate of the Street, called the mean, produces another StarMine metric called the Predicted Surprise. Stocks with positive surprises tend to have above-average price performance. Stocks with negative surprises tend to under perform the market, according to StarMine.
Interestingly, mean estimates are very close to the SmartEstimate for these technology companies. In the past, we have published much larger differences for companies in other sectors, including resources and energy.
The third StarMine measurement applied to this screen is the Analyst Revisions Model, or ARM, which is a measure of the change in analyst sentiment ranging between 1 and 100, with 100 representing the highest rank.
The ARM looks at changes in the consensus over multiple time frames and not just for earnings, but also EBITDA and revenue revisions. It also takes into account the Predicted Surprise percentage shift on these various measures. When this score is near the top (100 – the highest ranking) or bottom (1 – the lowest ranking) of its range, it is highly predictive of future earnings revisions up or down and helps investors anticipate these events, StarMine says.
We have organized the stock rankings here by their ARM scores, which look relatively strong across the board. Three semiconductor stocks top the list. KLA-Tencor Corp. provides process control and yield management solutions for chip makers. The stock flies beneath the radar of the mainstream media and has the 20 analysts or so who cover it split about 50-50 on whether it is a buy or hold.
ASML Holding NV , based in the Netherlands, designs, manufactures, markets, and services semiconductor processing equipment. Growth and share appreciation have been very strong in the last year. Only a half dozen analysts cover the company. There are two buys, three holds and a sell rating on the shares.
STMicroelectronics N.V. , based in Geneva, designs, develops, manufactures and markets a range of semiconductors for telecom, automotive and industrial clients.
All three of the stocks trade at a price-to-earnings ratio slightly below the average multiple seen on the S&P 500 today.