SMCI - PTF: Technology Dashboard For April

2023-04-18 08:00:00 ET

Summary

• Semiconductors and electronic equipment are more attractive than other tech industries.
• Hardware has the worst value and quality scores.
• Invesco DWA Technology Momentum ETF: a technology fund for swing trading.
• 7 stocks cheaper than their peers in April.

This monthly article series shows a dashboard with aggregate industry metrics in technology and communication services. It may also serve as a top-down analysis of sector ETFs (exchange-traded funds) like Vanguard Information Technology Index ETF ( VGT ), Technology Select Sector SPDR ETF ( XLK ) and iShares U.S. Technology ETF ( IYW ), whose largest holdings are used to calculate these metrics. This month's article will focus on a lesser-known fund: Invesco DWA Technology Momentum ETF ( PTF ).

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each industry: Earnings Yield ("EY"), Sales Yield ("SY"), Free Cash Flow Yield ("FY"), Return on Equity ("ROE"), Gross Margin ("GM"). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non available when the "something" is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for hardware in the table below is the 11-year average of the median Earnings Yield in hardware companies.

The Value Score ("VS") is defined as the average difference in % between the three valuation ratios ((EY, SY, FY)) and their baselines (EYh, SYh, FYh). The same way, the Quality Score ("QS") is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week's closing. Columns stand for all the data named and defined above.

Value And Quality chart

The next chart plots the Value and Quality Scores by industries (higher is better).

Evolution since last month

The most notable change is an improvement in quality for communication equipment.

Momentum

The next chart plots momentum data.

Interpretation

Semiconductors are the most attractive subsector: valuation is close to 11-year averages, and quality is above the historical baseline. Electronic equipment also looks good: it is overvalued by about 10%, but an excellent quality score may justify it. Other industries are overvalued by 24% to 40% regarding the same metrics. Hardware has the worst value and quality scores.

Focus on PTF

The Invesco DWA Technology Momentum ETF has been tracking the Dorsey Wright Technology Technical Leaders Index since 10/12/2006. It has 40 holdings and a net expense ratio of 0.60%. Capital-weighted ETFs like VGT and XLK have much cheaper management fees (0.10%). The underlying index selects and weighs constituents using a score based on price relative strength, and it is rebalanced quarterly. The aggregate weight of the five largest holdings is capped at 25%.

The fund is invested mostly in two industries: semiconductors (40% of asset value) and software (39%). The portfolio is quite concentrated: the top 10 holdings, listed below with fundamental ratios, represent 38.7% of assets.

The next table shows that performance since inception is underwhelming. PTF has lagged XLK by over 3% in annualized return, and it shows a higher risk measured in volatility (standard deviation of monthly returns).

However, the two funds are almost tie in the last 3 years:

As it amplifies ups and downs, Invesco DWA Technology Momentum ETF looks more like a swing-trading instrument than a buy-and-hold investment.

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a hardware company with an Earnings Yield above 0.0244 (or price/earnings below 40.98) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

It is a rotational list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.

For further details see: