Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Christian Godin is a portfolio manager at Inovestor Asset Management.

What are we looking for?

The tech rally shouldn’t be a surprise considering this year’s work-from-home environment. The health and safety measures put in place by government authorities around COVID-19 forced consumers to change their habits to include more tech products in their lifestyle. But do tech stocks justify their lofty valuations?

For perspective, we compare today’s results with a similar screen of tech stocks we did two years ago.

Story continues below advertisement

The screen

We screened U.S. tech companies focusing on the following criteria:

  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA gives us a sense of how much value this stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the capital expense;
  • Positive EVA and EVA growth on a per-share basis over 12 months;
  • Economic performance index (EPI) – the ratio of return on capital to cost of capital – must be greater than one;
  • Average five-year return on capital must be greater than 10 per cent and the 12-month change in return on capital must be positive (not shown);
  • Future growth value/market value (FGV/MV) and the 12-month change in FGV. The FGV/MV ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
  • Beta – this gives us an idea of how closely the company mimics the market’s fluctuations. A beta of less than one would indicate the stock is less volatile than the market at large.

For informational purposes, we have also included recent stock price, dividend yield and one-year return (as of last month’s end). Please note that some ratios may be reported at end-of-previous quarter.

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the EVA approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock-picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks, and American depositary receipts).

What we found

The current market environment for tech stocks is more challenging than in late 2018: We see higher valuations and decreasing EVA per share growth compared with our previous screen. More companies show an extreme FGV/MV, signalling elevated risk, and the average EVA growth is 91 per cent, compared with 146 per cent two years ago.

Zoom Video Communications Inc. has been one of the big winners during this upheaval. The communications technology company certainly has a good EPI, while its three-month sales growth (not shown) is an incredible 190.4 per cent. That said, its EVA per share of 81 US cents for a stock trading in the US$480 range definitely doesn’t support the current valuation.

Computer software company Adobe Inc. is one of two names on this list that made our screen two years ago (the other was Jack Henry & Associates). Adobe’s valuation based on the FGV/MV is lower than in 2018 (80.8 vs. 84.5). The company also has the second-highest 12-month change in EVA per share on our list. This indicates a strong improvement of its profitability. In this case, the valuation can be justified by strong financial performance and doesn’t seem disconnected with its fundamentals based on historical data.

Investors are advised to do further research before investing in any of the companies shown here.

Story continues below advertisement

Select U.S.-listed information technology stocks

CompanyTickerIT SubsectorMkt. Cap. (US$ Mil.)EVA 12M Chg. (%)EVA/ShareEVA/Share 12M Chg. ($)EPI5Y Avg. ROCFGV/MVFGV 12M Chg.BetaDiv. Yld. (%)1Y Price Chg. (%)Recent Price (US$)
Zoom Video Comm.ZM-QTech. Hrdwre. & Equip. 136,191 n/a0.81n/a3.812.497.978.70.50.0526.4482.23
Veeva SystemsVEEV-NTech. Hrdwre. & Equip. 41,798 6.70.820.171.615.192.038.30.90.080.6275.56
MSCI Inc.MSCI-NSoftware & Serv. 29,308 1.05.540.112.418.782.025.41.00.957.7348.16
Adobe Inc.ADBE-QTech. Hrdwre. & Equip. 232,045 35.85.291.802.417.080.832.70.80.073.0478.99
Tyler TechnologiesTYL-NSoftware & Serv. 14,302 14.42.590.421.514.878.036.60.70.034.8350.72
Microsoft Corp.MSFT-QTech. Hrdwre. & Equip. 1,580,000 30.02.890.681.913.372.825.90.91.150.4206.19
Cadence Design Sys.CDNS-QTech. Hrdwre. & Equip. 29,876 161.32.211.811.912.264.311.41.00.060.6105.32
Jack Henry & Assoc.JKHY-QSoftware & Serv. 12,454 11.22.900.202.121.563.713.60.91.111.6161.56
Ubiquiti Inc.UI-NTech. Hrdwre. & Equip. 10,998 72.95.261.665.234.861.24.90.91.039.8165.26
Logitech Int'lLOGI-QTech. Hrdwre. & Equip. 13,558 194.52.161.562.813.445.413.50.51.190.877.78
Garmin Ltd.GRMN-QTech. Hrdwre. & Equip. 18,398 79.12.520.761.814.441.66.30.92.612.294.93

Source: Inovestor

For more details about these tech stocks, please subscribe the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies