What are we looking for?
Profitable but undervalued information-technology companies.
The screen
North American markets have been rallying as investors have been deploying excess cash in the midst of improving economic conditions and a generally strong earnings season. Gains have been broadly based with strength seen from all sectors and the IT sector has been a relative outperformer – the S&P 500 IT total return index and the S&P/TSX composite IT total return index are up 6.2 per cent and 5.1 per cent, respectively, so far in July.
In order to find profitable IT companies trading at reasonable valuations, my colleague Lawrence Ullman and I used Bloomberg to find the top 10 IT companies from the S&P/TSX composite and S&P 500 with the best mix of:
- EV/sales (total enterprise value to sales, lower is better);
- EV/EBITDA ratio less than 10 (enterprise value to earnings before interest, taxes, depreciation and amortization – lower is better);
- Return on invested capital (higher is better);
- Three-month consensus EPS estimate revision no worse than minus 5 per cent;
- 12-month price change (lower is better);
- One-month price change no worse than minus 15 per cent.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.
What we found
Using Bloomberg, we performed a back-test starting June 30, 2006, reselecting an equally weighted portfolio of the top 10 qualifying stocks every three months.
Over the entire period, this strategy would have generated an annualized total return of 9.5 per cent, in U.S. dollar terms, compared with 7.4 per cent for the S&P 500 total return index. Over the past year, this strategy has actually underperformed somewhat with a return of 3.1 per cent compared with 4.0 per cent for the S&P 500 total return index.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.
Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.