What are we looking for?
Relatively undervalued stocks in the U.S. and Canadian tech sectors.
The screen
These are the metrics chosen for our filter, using the Eikon Screener application:
- The Thomson Reuters Business Classification (TRBC), which allows us to identify top-performing sub-sectors within tech.
- A market cap of more than US$4-billion, in order to include only companies that are past the early growth stages and established in the market.
- A price-to-intrinsic value ratio less than 0.75. This means that the companies chosen are currently priced at 75 per cent or less of their fundamental value, which is calculated with the discounted cash flow model; this takes into account a company’s free cash flow and weighted average cost of capital.
- The quick ratio, which is a measure of how well a company can meet its short-term financial liabilities. A minimum ratio of two is required, meaning that the companies’ value of current assets is at least twice that of current liabilities.
The companies that we find using the above filters will then be ranked by total cash flow from operating activities.
More about the Eikon Screener
The Screener is an application available within Thomson Reuters Eikon that allows an investor to filter a particular universe of stocks with hundreds of possible criteria. One may then rank the results according to one factor or several, and weigh this influence on the ranking accordingly. The Screener is a quick way to see the top performers in the universe, which can reflect the investor’s allocation strategy. It’s also easy to create templates so that one can review changes in ranking over time.
What we found
Our filter generated eight results, all of them U.S.-based. Five of the eight firms are in the semiconductor business, which has proven to be less volatile than other sub-sectors in the past. Those businesses can be considered the backbone of the industry in many respects; their cash flows are more regular and there has been a lot of consolidation between them.
The price-to-intrinsic value ratio is the most important metric in our search to find undervalued stocks. The intrinsic-value method used is based on operating cash flows and, cash being essential to any business, it proves to be a technique used frequently by investment banks to analyze businesses. Western Digital Corp. proved to be the best by far in that category.
A high quick ratio means a company will be able to survive without having to resort to more debt, at least for one more year. Broadcom (also the firm with the highest cash-flow ranking) comes first in our analysis.
Investors are encouraged to conduct further research before investing in any the companies shown here.
Guillaume Laframboise is a client specialist with Thomson Reuters.