What are we looking for?
U.S.-listed technology services companies that look poised to continue their recent strong performance.
With the first half of 2018 nearly behind us, there have been some clear winners and losers in terms of sector performance of the U.S. market. Technology has outperformed all other sectors – up 13.6 per cent year-to-date against 3.3 per cent for the S&P 500 Index over all. The technology services industry makes up a fairly small part of this sector but has been one of the best performing sub-industries, now up 9.5 per cent in the past month. Can we find well-valued companies within this industry that may have more room to run?
We will be using Trading Central Strategy Builder to search for U.S.-listed technology services stocks with strong earnings growth, reasonable valuations and positive analyst ratings.
We will start by screening for U.S. tech services stocks with a market capitalization of at least US$5-billion. This will focus our search on the largest 20 per cent of companies in this market. To ensure we consider stocks that still have reasonable valuations, we will screen for forward price-to-earnings (PE) ratios of 25 or less and price-to-sales ratios of less than 5.
To focus in on companies that have demonstrated strong historical earnings growth, we will select stocks with a five-year earnings growth rate of 10 per cent or more. Lastly, to further extend the theme of selecting technology stocks expected to outperform, we will consider only stocks rated “buy” or “strong buy” by a consensus of industry analysts.
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What did we find?
Topping our list is DXC Technology Co. (DXC-N), an IT services company formed in 2017 by the merger of CSC and the enterprise services business of HP Enterprise. The company has a very low forward P/E of just 10.4 and strong five-year earnings growth. The recent drop in the company’s stock price is owing to the June 1 spin-off of its U.S. public service business into a new venture called Perspecta (PRSP-N). DXC stock is now trading roughly flat year-to-date after a very strong performance in 2017.
Canadian IT services firm CGI Group Inc. (GIB-N) also makes our list in the 4th position. CGI stock is up 16 per cent year-to-date based on successive quarters of strong results. On May 2, the company announced second-quarter results that beat analyst expectations, causing a one-day rally of almost 4 per cent.
Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly re-balancing, the screen described had a 16.4-per-cent annualized return compared with 11.8 per cent for the S&P 500 and 11.1 per cent for the DJIA.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of customer success at Trading Central.