This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry.
I wrote last week in my SP 500 monthly dashboard that Technology (including Telecom) is fairly priced regarding historical averages of valuation ratios and above the baseline in profitability (measured by ROE). In a closer look at industry level and extending the stock universe to mid caps, Hardware, Semiconductors, Communication Equipment and Wireless Telecom Services have mixed valuation factors and are undervalued for at least one of them. They are also above their historical averages in profitability. Other industries are less attractive. Software and Diversified Telecom Services are the most overpriced. This is not justified by an exceptional profitability: both are close to their historical baselines.
Since last month:
P/E has improved in Wireless Telecom Services and deteriorated in Internet, Communication Equipment, Computers/Peripherals.
P/S has improved in Computers/Peripherals, Wireless Telecom Services and deteriorated in Internet, Software, Semiconductors.
P/FCF has deteriorated in Internet, Software, Diversified Telecom Services and is stable elsewhere.
ROE has improved in Computers/Peripherals and deteriorated in Diversified Telecom Services.
The Technology Select Sector SPDR ETF (XLK) is almost tied with the SPDR SP 500 Trust ETF (SPY) in monthly return.
In this period, the 5 best-performing SP 500 Tech or Telecom stocks are Alliance Data Systems Corp. (NYSE:ADS), Advanced Micro Devices Inc. (NASDAQ:AMD), CA Inc. (NASDAQ:CA), Oracle Corp. (NYSE:ORCL) and Red Hat Inc. (NYSE:RHT).
Some cheap stocks in their industries
The stocks listed below are in the SP 1500 index, cheaper than their respective industry factors for Price/Earnings, Price/Sales and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection. This strategy rebalanced monthly has an annualized return about 12.76% in a 17-year simulation. The sector ETF XLK has an annualized return of only 2.83% on the same period. I update every month 8 lists like this one, covering all sectors (some sectors are grouped). The 8 lists together have returned about 25% in 2016. If you want to stay informed of updates, click “Follow” at the top of this page. My Marketplace Subscribers have early access to the stock lists before they are published in free-access articles. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.
Detail of Valuation and Quality indicators in Technology and Telecom on 7/12/2017
I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price-to-Sales (P/S), Price-to-Free cash flow (P/FCF) and Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.
For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).
The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average (“Avg”) between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above (“D-xxx”).
* Averages since 2003
The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors, the difference to average is calculated in the direction where positive is good. For valuation ratios lower is better, for ROE higher is better. On the charts below, higher is always better.
Price/Earnings relative to historical average:
Price/Sales relative to historical average:
Price/Free Cash Flow relative to historical average:
ROE relative to historical average:
The next chart compares the price action of XLK with that of SPY in the last 3 months.
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Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).
Disclosure: I am/we are long CTXS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.