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number cruncher

What are we looking for?

The tech-heavy Nasdaq Composite Index recently slipped into what some consider bear market territory. As a result, my team member Allan Meyer and I thought we would be opportunistic and analyze beaten up information technology stocks, using our investment philosophy focused on safety and value.

We wanted to see how IT, often identified as a growth sector, stacks up using our conservative approach, especially in this time of weakness and volatility as we wait for money to flow back into the sector. Some names do offer our favourite characteristics, such as dividends, good balance sheets and value.

The screen

We started with U.S.-listed equities in the IT sector with a market capitalization of US$50-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.

Dividend yield is the annualized projected dividend divided by the share price. All companies on this list are expected to pay a dividend, which is in line with our investment philosophy.

Debt-to-equity is our final safety measure. A smaller number is better. As we like to say, it is difficult to go bankrupt when you have little or no debt.

Free-cash-flow-to-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 versus earnings-based measures. Enterprise value is a measure of a company’s total value.

Price-to-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 past quarter. A positive number indicates earnings are increasing, and vice versa for a negative number. Positive 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?

U.S.-listed information technology stocks

CompanyTickerMkt. Cap. (US$ Bil.)Div. Yld. (%)Debt to Eqty. (%)FCF/EV (%)P/EEarns. Mom. (%)52W Ttl. Rtn. (%)Recent Price (US$)
Apple Inc.AAPL-Q2,525.10.6149.03.724.47.528.6150.62
Microsoft Corp.MSFT-Q2,099.60.949.82.827.15.319.8276.44
Nvidia Corp.NVDA-Q552.50.141.11.538.714.072.0213.30
Visa Inc.V-N412.50.855.83.525.46.6-11.8200.33
Mastercard Inc.MA-N317.50.6190.12.830.09.2-14.7328.59
Broadcom Inc.AVGO-Q235.92.8159.35.616.46.431.8567.80
Cisco Systems Inc.CSCO-Q227.22.827.96.915.11.515.154.30
Oracle Corp.ORCL-N207.61.61,608.36.015.1-0.617.677.07
Accenture PLCACN-N205.11.20.34.227.85.118.9307.68
Intel Corp.INTC-Q186.63.239.96.012.9-7.3-25.144.40
Qualcomm Inc.QCOM-Q171.71.8158.25.212.512.419.3141.29
Texas InstrumentsTXN-Q157.32.758.14.218.68.30.5166.72
Intuit Inc.INTU-Q124.20.620.62.433.98.511.5424.63
IBM Corp.IBM-N111.55.3273.67.312.414.76.7123.94
Applied Materials Inc.AMAT-Q109.20.844.54.614.47.38.9120.13
Auto. Data ProcessingADP-Q87.12.052.73.028.22.115.5207.00
Micron TechnologyMU-Q81.50.515.43.36.822.8-16.969.40
Analog Devices Inc.ADI-Q77.22.117.83.117.17.80.4145.63
Lam Research Corp.LRCX-Q67.41.283.05.113.28.3-7.1469.00
Fidelity Nat'l Info. Serv.FIS-N54.52.143.05.012.04.8-38.089.06
Average400.61.7154.44.320.17.27.7
Median179.11.451.24.216.87.410.2

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

Intel Corp., Cisco Systems Inc., Qualcomm Inc., International Business Machines Corp. and Fidelity National Information Services Inc. generally score well for safety and value. IBM also boasts the best dividend, and valuation as per FCF/EV, however its debt levels are on the high side.

Micron Technology Inc. also looks interesting as it is the least expensive on a P/E basis and has the best earnings momentum. It should be noted that Accenture PLC is the only name with almost no debt, while Oracle Corp. has the most.

Despite the recent weakness in the IT sector, many of the names have still managed to post positive returns over the past year.

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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