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What are we looking for?

Wealth creators in the U.S. information technology sector.

Signals indicating a nearing bear market have been encircling us for months. In periods such as these, fundamental analysis is key; we’re looking for real quality that can protect one’s portfolio. With U.S. technology stocks taking a particularly big hit recently, I decided to make that sector our focus.

The screen

We screened the U.S. information technology sector by focusing on the following criteria:

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  • 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/share, and EVA/share growth 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;
  • Future growth value/market value (FGV/MV) and its 12-month change. This 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 research platform based on fundamental analysis specializing in the economic value-added (EVA) method. It helps advisers quickly identify attractive investment opportunities and easily communicate them to their clients through client-friendly reports. In addition, Inovestor allows investors to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

What we found

One of the companies that grabbed my attention is the Match Group Inc., a U.S. internet company that owns several online dating sites and applications. Match has encountered the highest growth over that past 12 months with its stock price almost doubling in value, although from a fundamental perspective, this translates into a 62-per-cent premium, as indicated in the FGV/NV column of the accompanying table. Match has had impressive earnings during the last quarter and solid return on capital; it also having the lowest beta of any company in our screen, which makes it a comparatively defensive play given the current market situation.

Broadcom Inc., a developer and supplier of semiconductors, stood out for a different reason. In terms of wealth creation, Broadcom comes out in first place with a current EVA/share of US$41, the highest EPI and the largest 12-month EVA/share growth. In addition, the five-year return on capital, at 42 per cent, is the strongest on our list. The stock, on the other hand, has been on a diverging path since the beginning of 2018. Being closely correlated to the market, Broadcom shares have lost 15 per cent over the past 12 months. Given the strong earnings but falling stock price, Broadcom is the only player on our list that is trading at a slight discount, as indicated by an FGV/MV of minus 8.2.

Readers are advised to conduct further research before investing in any of the securities shown below.

U.S. information technology stocks

Company Ticker Price (US$) Market Cap (US$Bil)  1Yr Return (%) Beta Div. Yield (%) EVA Per Share (US$) EVA Per Share 12M Chg (%) FGV on MV (%) Avg 5Yr Return on Capital  Return on Capital 12M Chg EPI EVA 12M Chg (%) FGV Ch. 12M
Match Group Inc. MTCH-Q 52.15 14.45 93.4 0.18 - 2.63 1.7 62.4 21.1 18.5 3.1 394.0 4.2
Adobe Inc. ADBE-Q 239.64 117.19 40.3 1.12 - 2.45 1.4 84.5 10.5 4.4 1.4 111.4 28.5
Intuit Inc. INTU-Q 212.98 55.08 39.7 1.18 0.76 3.36 0.7 81.3 20.0 3.4 2.6 99.7 32.4
Jack Henry & Associates Inc. JKHY-Q 149.21 11.51 36.1 0.78 1.04 4.34 1.7 65.3 21.2 7.1 2.4 110.0 16.6
Apple Inc. AAPL-Q 207.48 986.56 29.5 1.34 1.2 5.80 1.3 54.7 24.4 2.1 1.9 27.8 6.7
CDW Corp. CDW-Q 88.04 13.29 28.6 1.04 0.94 3.02 0.6 31.1 13.3 1.4 1.6 60.8 15.0
SS&C Technologies Holdings SSNC-Q 50.52 12.12 27.3 1.19 0.51 1.56 0.6 39.6 12.9 2.7 1.4 153.3 8.6
Fiserv Inc. FISV-Q 74.99 30.07 22.5 0.79 - 2.58 0.5 42.4 16.6 1.2 2.1 90.0 1.1
Arista Networks Inc. ANET-Q 257.77 19.34 15.2 1.45 - 6.17 2.7 80.7 26.3 4.4 2.2 181.3 16.5
Fidelity National Information Services FIS-N 103.65 34.00 12.2 0.95 1.15 4.16 1.0 2.3 11.5 1.6 1.4 168.5 -0.2
Intel Corp. INTC-Q 47.11 215.01 3.1 0.96 2.48 1.89 0.5 16.8 14.2 0.8 1.6 175.7 0.1
Paychex Inc. PAYX-Q 65.49 23.51 2.7 0.96 2.89 0.83 0.2 68.4 11.8 0.8 1.3 41.1 6.0
Nvidia Corp. NVDA-Q 214.92 130.67 1.9 1.50 0.24 4.80 2.6 83.4 17.5 12.1 1.7 204.3 15.2
Texas Instruments Inc. TXN-Q 95.06 91.72 -4.0 1.17 2.31 3.35 0.4 53.5 22.2 0.2 2.6 143.2 -1.8
Micron Technology Inc. MU-Q 40.32 46.81 -14.9 1.48 - 9.17 6.9 10.0 19.0 21.2 1.7                                       2,398.4  -130.3
Broadcom Inc. AVGO-Q 220.77 91.24 -15.3 0.92 2.83 41.51 24.7 -8.2 42.3 27.0 3.4                                       1,481.3  -161.3

      
Source: Inovestor

Noor Hussain is an analyst and account executive for Inovestor Inc.

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