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What are we looking for?

With tech stocks reporting earnings and making headlines recently, my associate Allan Meyer and I thought we would analyze U.S. information-technology (IT) companies using our investment philosophy focused on safety 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 as larger companies tend to be more diversified, liquid and less volatile.

Dividend yield is the annualized projected dividend divided by the share price. Mr. Meyer and I, and our clients, like to get paid while we wait for appreciation, and dividends generally reflect safety and stability in the underlying company.

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Debt-to-equity is also a safety measure. A smaller number is better. As we like to tell clients, it’s hard to go bankrupt when you have little or no debt.

Price-to-earnings is a 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, the opposite is true for a negative number. This metric could foreshadow future dividend raises, or cuts and also share price appreciation or depreciation.

Free cash flow to enterprise value (FCFF/EV) is a valuation metric. 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. This metric is one of the cornerstones of our investment philosophy.

Lastly, we included the 52-week total return to track performance as well as the average and median for all metrics to allow for better comparability.

What did we find?

Micron Technology Inc. scores very well for both its safety and value metrics. It’s only slight is that it does not pay a dividend, but that’s not uncommon for the sector. Apple Inc., Intel Corp., Cisco Systems Inc. and Texas Instruments Inc. also look attractive on most measures.

Exchange-traded funds (ETFs) are an option for investors that like the sector but prefer to diversify away individual security risk. IYW is a U.S.-listed iShares technology ETF while ZQQ is a Canadian-listed currency-hedged ETF on the Nasdaq 100, a diversified technology index.

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Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Select U.S. technology stocks

Company Ticker Recent Price (US$) Market Cap (US$Bil) Div. yield (%) Debt/Equity (%) Price/Earnings Earns Momentum (%) FCFF to EV (%) 52 Wk Total Return (%)
Apple Inc. AAPL-Q 190.29 935.3 1.5 86.3 14.7 6.5 5.4 28.8
Alphabet Inc. GOOG-Q 1,217.26 850.3 0.0 2.6 27.5 19.7 3.2 30.8
Microsoft Corp. MSFT-Q 106.08 815.0 1.6 92.2 24.5 4.0 4.3 49.0
Facebook Inc. FB-Q 172.58 498.3 0.0 0.0 21.7 6.2 3.8 1.6
Visa Inc. V-N 136.74 303.7 0.6 56.1 26.4 8.6 2.8 36.5
Intel Corp. INTC-Q 48.10 221.8 2.5 38.8 11.4 8.7 4.5 35.8
Mastercard Inc. MA-N 198.00 205.5 0.5 99.2 28.1 11.0 2.6 53.8
Cisco Systems Inc. CSCO-Q 42.29 198.9 3.1 51.0 14.6 2.4 7.9 37.9
Oracle Corp. ORCL-Q 47.68 190.0 1.6 132.6 14.1 3.3 8.3 -3.4
NVIDIA Corp. NVDA-Q 244.86 148.6 0.2 26.8 32.5 25.8 2.1 49.3
IBM Corp. IBM-N 144.93 133.6 4.3 266.1 10.4 2.1 8.4 4.0
Adobe Systems Inc. ADBE-Q 244.68 119.8 0.0 22.2 33.2 13.0 2.4 66.0
Texas Instruments Inc. TXN-N 111.32 109.0 2.2 39.4 18.7 7.8 4.3 39.5
Accenture PLC ACN-N 159.33 107.5 1.7 0.3 22.1 4.2 4.3 25.0
Salesforce.com Inc. CRM-N 137.15 101.3 0.0 24.6 54.9 34.1 2.3 50.4
PayPal Holdings Inc. PYPL-Q 82.14 97.2 0.0 6.3 31.4 5.9 2.0 38.4
Broadcom Inc. AVGO-Q 221.77 95.7 3.2 86.5 n/a 6.8 5.6 -8.5
Qualcomm Inc. QCOM-Q 64.09 94.2 3.9 71.3 15.9 -2.3 5.3 24.7
Micron Technology Inc. MU-Q 52.79 61.2 0.0 59.9 4.5 17.2 6.4 86.3
Automatic Data Processing Inc. ADP-Q 134.99 59.5 2.0 57.9 26.5 6.4 -4.9 18.1
Activision Blizzard Inc. ATVI-Q 73.42 55.9 0.5 46.4 26.0 3.1 3.9 18.3
Intuit Inc. INTU-Q 204.24 52.4 0.8 36.0 31.5 20.2 2.7 50.0
Average 247.9 1.4 59.2 23.4 9.8 4.0 33.3
Median 216.7 1.4 58.0 23.8 9.9 3.9 33.5

Source: Thomson Reuters, Wickham Investment Counsel Inc.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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