What are we looking for?
Efficient wealth creators in the information technology sector.
The screen
We searched for Canadian, U.S.-listed IT companies using the following metrics:
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.5. An EPI ratio of one or more indicates a company's capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- A positive 12-month EPI change;
- A minimum market cap of $10-billion (U.S.) for U.S.-listed companies (including American depositary receipts, or ADRs) and $1-billion (Canadian) for Canadian companies;
- A return on capital of 10 per cent or greater;
- A five-year average annual return on capital above 10 per cent;
- Positive free-cash-flow-to-capital ratio. This metric gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good; 5 per cent and above is excellent.
Dividend yields are displayed for informational purposes.
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 ADRs), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
A total of nine IT companies fit our criteria; seven from the United States, one ADR and only one Canadian company. The best economic performer of this group, and by far, is the Canadian firm – Markham, Ont.-based Enghouse Systems Ltd., with an EPI of 3.0. It also generates a high free-cash-flow-to-invested-capital ratio. Visa Inc. is the most attractive megacap of this group, beating Alphabet Inc. with a higher return on capital and greater FCF-to-invested-capital ratio. We also note that Visa's current return on capital is higher than its five-year average while that's not the case for Alphabet Inc. For those of you wondering, Visa rival MasterCard didn't make the cut because its EPI decreased in the past 12 months.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.