Summary
- Semiconductors are the only industry with good value and quality scores.
- Communication equipment is the most overvalued one.
- Fast facts on PTF.
- 6 stocks cheaper than their peers in January.
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 like the Vanguard Information Technology Index ETF ( VGT ), the Technology Select Sector SPDR ETF ( XLK ) and the 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: the 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.
VS | QS | EY | SY | FY | ROE | GM | EYh | SYh | FYh | ROEh | GMh | RetM | RetY | |
Hardware | 1.68 | -23.79 | 0.0494 | 1.3377 | 0.0110 | 4.36 | 38.46 | 0.0363 | 0.9448 | 0.0402 | 7.23 | 41.73 | -1.45% | -27.90% |
Comm. Equip. | -35.54 | 3.14 | 0.0288 | 0.1864 | 0.0141 | 18.72 | 56.05 | 0.0314 | 0.2774 | 0.0409 | 15.84 | 63.59 | -0.74% | -12.30% |
Entertainment | -31.95 | -34.91 | 0.0135 | 0.6231 | 0.0137 | 6.42 | 41.99 | 0.0486 | 0.4453 | 0.0376 | 17.13 | 45.29 | 2.03% | -21.10% |
Electronic Equip. | -26.70 | 19.78 | 0.0381 | 0.5773 | 0.0237 | 17.04 | 38.68 | 0.0430 | 0.8046 | 0.0398 | 13.00 | 35.67 | 3.91% | -5.14% |
Software | -26.29 | -6.07 | 0.0210 | 0.1183 | 0.0275 | 16.39 | 82.11 | 0.0268 | 0.1728 | 0.0370 | 17.74 | 86.01 | -0.70% | -34.50% |
Telecom | -24.83 | -8.41 | 0.0360 | 0.7708 | 0.0093 | 10.06 | 57.14 | 0.0500 | 0.6539 | 0.0261 | 11.75 | 58.57 | 6.87% | -32.92% |
Semiconductors | 0.81 | 17.08 | 0.0561 | 0.2378 | 0.0301 | 31.75 | 62.55 | 0.0465 | 0.2464 | 0.0353 | 23.76 | 62.23 | 0.88% | -30.00% |
IT Services | -24.33 | 8.28 | 0.0343 | 0.2113 | 0.0242 | 32.55 | 50.26 | 0.0385 | 0.3283 | 0.0329 | 25.89 | 55.34 | 2.42% | -15.66% |
Value And Quality chart
The next chart plots the Value and Quality Scores by industries (higher is better).
Evolution since last month
Since last month, value has improved in communication equipment, and deteriorated the most in telecommunications.
Momentum
The next chart plots momentum data.
Interpretation
Hardware and semiconductors are close to the historical baseline in value. After looking at quality metrics, only semiconductors are really attractive. Other industries are overvalued by 24% to 36% relative to 11-year averages. It may be partly justified by a good quality score for electronic equipment, and to a lesser extent for IT services. Entertainment is the worst-looking industry regarding my metrics, with both scores far in negative territory.
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 45 holdings and a net expense ratio of 0.60%. Well-known passive index ETFs like VGT and XLK have cheaper management fees (0.10%). The index selects and weighs its constituents with a relative strength score and is rebalanced quarterly. The aggregate weight of the five largest holdings is capped at 25%.
The two heaviest industries in the portfolio are semiconductors and software (over 32% and 20% of asset value, respectively). The top 10 holdings, listed below with fundamental ratios, weigh 40.8% in aggregate.
Ticker | Name | Weight% | EPS growth %TTM | P/E TTM | P/E fwd | Yield% |
Apple, Inc. | 6.20 | 8.83 | 22.08 | 21.89 | 0.68 | |
Intuit, Inc. | 5.91 | -13.33 | 59.91 | 28.73 | 0.79 | |
Lattice Semiconductor Corp. | 5.23 | 87.85 | 65.67 | 41.53 | 0 | |
Cadence Design Systems, Inc. | 4.78 | 14.50 | 59.57 | 40.04 | 0 | |
ON Semiconductor Corp. | 3.66 | 152.62 | 16.90 | 12.37 | 0 | |
Array Technologies, Inc. | 3.37 | -32.05 | N/A | 68.07 | 0 | |
KLA Corp. | 3.31 | 25.34 | 18.97 | 17.03 | 1.24 | |
First Solar, Inc. | 3.00 | -79.21 | 204.48 | N/A | 0 | |
Super Micro Computer, Inc. | 2.76 | 291.37 | 9.87 | 7.98 | 0 | |
Impinj, Inc. | 2.58 | 10.31 | N/A | 130.63 | 0 |
PTF was a bit more resilient than XLK in 2022, outperforming it by 2.5 percentage points. However, the next chart shows that performance since inception is underwhelming:
As a conclusion, PTF 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 0.0494 (or price/earnings below 20.24) 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.
Kulicke & Soffa Industries, Inc. | |
Thryv Holdings, Inc. | |
Synaptics, Inc. | |
Diodes, Inc. | |
Alpha & Omega Semiconductor Ltd. | |
Gen Digital Inc. |
It is a dynamic, monthly 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:
PTF: Technology Dashboard For January