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What are we looking for?

The information technology sector has been showing some recent weakness after leading the pandemic rally over the past year. As a result, my associate Allan Meyer and I thought we would be opportunistic and analyze U.S.-listed IT stocks using our investment philosophy focused on safety and value. Traditionally known as a growth sector, we wanted to see how the IT space stacks up using our conservative approach. Some names do offer characteristics we love, such as dividends, clean 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 payout divided by the share price. All companies on this list are expected to pay a dividend.

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 compared with 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?

Intel Corp. and Cisco Systems Inc. score well for safety and value. Intel boasts the best value in both related metrics but does have slightly negative earnings momentum. International Business Machines Corp. has the highest yield and offers an attractive valuation, however it carries higher levels of debt. Oracle Corp. is the most leveraged (highest debt) but looks interesting otherwise. Apple Inc. posted the strongest earnings momentum. Kudos to any investor that purchased Applied Materials Inc. a year ago (total return of 150 per cent); that stock, as well as Broadcom Inc., Qualcomm Inc., Analog Devices Inc., and NXP Semiconductors NV, caught our attention. Overall, most of the sector has generated positive returns and earnings momentum.

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

Select U.S.-listed information technology stocks 

CompanyTickerMkt. Cap. (US$ Bil.)Div. Yld. (%)Debt/Eqty. (%)FCF/EV (%)P/EEarns. Mom. (%)52W Ttl. Rtn. (%)Recent Close (US$)
Apple Inc.AAPL-Q2,116.80.7173.13.524.020.669.1126.85
Microsoft Corp.MSFT-Q1,861.70.961.62.629.98.238.1247.18
Visa Inc.V-N481.90.666.52.134.90.026.2225.97
Mastercard Inc.MA-N363.10.5198.31.942.0-1.433.6366.34
Nvidia Corp.NVDA-Q355.20.141.21.440.613.889.9570.63
Oracle Corp.ORCL-N231.11.6592.85.016.84.652.580.15
Intel Corp.INTC-Q226.02.444.99.012.1-1.1-0.855.97
Cisco Systems Inc.CSCO-Q224.62.838.57.315.60.628.453.16
Accenture PLCACN-N193.31.20.44.132.01.556.8290.61
Broadcom Inc.AVGO-Q178.13.2172.16.215.66.170.5436.10
Texas Instruments TXN-Q168.12.274.03.424.010.567.5182.05
Qualcomm Inc.QCOM-Q145.42.0260.93.315.619.075.0128.94
IBM Corp.IBM-N130.64.5298.88.613.0-0.824.5146.17
Applied MaterialsAMAT-Q114.40.751.53.219.69.8150.0124.69
Intuit Inc.INTU-Q107.50.666.02.141.5-5.744.0392.54
Fidelity Nat'l Info. Svcs.FIS-N92.71.040.63.122.00.419.4149.46
Lam Research Corp.LRCX-Q83.60.8112.62.518.717.2140.6586.45
Auto. Data ProcessingADP-Q82.71.934.83.530.1-0.536.7194.40
Global Payments Inc.GPN-N57.70.435.33.323.13.815.5195.31
Analog Devices Inc.ADI-Q55.61.842.93.423.68.446.0150.79
NXP SemiconductorsNXPI-Q52.11.185.14.218.913.391.0189.03
Average348.71.5118.74.024.56.155.9
Median168.11.166.03.423.14.646.0

Source: Refinitiv Eikon, 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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