What are we looking for?
Technology stocks endured a difficult 2022, but the sector seems to be gaining some traction and it has rallied lately, perhaps buoyed by solid recent results from some tech heavyweights and headlines about artificial intelligence (AI) piquing investor interest in the sector.
As a result, my team member Allan Meyer and I thought we would analyze information technology (IT) stocks using our investment philosophy that focuses on safety and value. Often identified as a growth sector, we wanted to see how IT stacks up using our conservative and classical investment approach. Some names offer our favourite characteristics, including dividends, good balance sheets, consistent earnings and value.
The screen
We started with U.S.-listed equities in the IT sector with a market capitalization of US$30-billion or more, sorted from largest to smallest. We view market capitalization as a safety factor – larger companies tend to be more liquid and diversified than smaller ones.
Dividend yield is the projected annual dividend divided by the share price. In keeping with the spirit of our investment philosophy, companies on this list are expected to pay a dividend.
Debt/equity is our final safety measure. A smaller number is better. It is difficult to go bankrupt when you have little or no debt.
Free cash flow/enterprise value (FCF/EV) is a valuation metric and one of the cornerstones of our investment philosophy. A higher number is better. Free cash flow reflects the cash available to investors after considering all the costs related to doing business and we believe it is more difficult to manipulate than earnings-based measures. Enterprise value is a measure of a company’s total value – equity plus debt, minus cash on the balance sheet.
Price/earnings is the share price divided by earnings. It is another valuation metric – the lower the number, the better the value.
Earnings momentum is the change in annualized earnings over the most recent quarter. A positive number indicates earnings are increasing, and vice versa for a negative number. Increases over the long term should lead to share price appreciation and dividend hikes.
Lastly, we included the 52-week total return to track performance, and the average and median numbers for better comparability.
What did we find?
Cisco Systems CSCO-Q scores well across the board for safety and value, and it is the least expensive name, based on its P/E ratio.
Analog Devices ADI-Q has the best earnings momentum and generally scores positively according to our investment philosophy, along with Broadcom and Applied Materials.
Oracle ORCL-N is the only name without debt and also looks interesting.
Cognizant Technology Solutions CTSH-Q boasts the strongest FCF/EV ratio, our featured metric, and merits a closer look.
IBM IBM-N has the highest dividend and shows signs of value, but also carries one of the larger debt loads.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.
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Sean Pugliese, CFA