2023-04-13 08:04:20 ET
Summary
- 24 highly rated Information Technology stocks were evaluated by means of a multi-factor value matrix.
- The value matrix is a broad effort to identify those Information Technology stocks that are likely to be amongst the best and poorest investments in the group.
- Investors are once again cautioned to consider every investment carefully and on its own merits.
Background
Seeking Alpha includes coverage for almost 25,000 stocks of which 1805 are part of the Information Technology sector. Of these 1805 Information Technology stocks, a small number receive the overwhelming the majority of analyst coverage. I find it useful to take a broader view and begin with a simple screen followed by an evaluation based on empirical data. This analysis and several others I have published here on Seeking Alpha follow that broader approach. In this case, I will evaluate some highly rated Information Technology stocks relative to the group using a value matrix.
Relative Quality Evaluation
Twenty-four Information Technology stocks with a minimum Morningstar rating of hold were selected for further analysis. These 24 stocks were compared using a value matrix with factors including: PE vs 5YR average PE, 1YR PE Change, % Below 52Wk High, Net Profit Margin, and Debt/Equity. The values for each company's factors were normalized by means of statistical percent ranking with relation to the group. The quality matrix was calculated as the sum of the percent ranks of the factors.
Quality Matrix Chart
The above chart is sorted in descending order of the best value (highest matrix score) to the poorest value (lowest matrix score).
Those readers who appreciate tedious math may be interested in exactly how PE ratios including negative values were compared. PE favorability is not continuous at the transition between positive and negative values. For PE > O, a lower value is most favorable even as the value approaches its limit of zero. However, when PE < 0, a lesser or more negative value is most favorable. Assuming share price is constant, a negative PE of greater absolute magnitude reflects smaller negative EPS. In order to compare PE ratios continuously across their entire range, a bit of math gymnastics is required. Therefore, a value for each stock's PE vs 5YR Average was calculated as follows:
PE vs 5YR Average = (1/PE 5YR Ave - 1/PE MRFY) / |1/PE 5YR Ave|
As a result, the lowest PE vs 5YR Average result including negative values is most favorable. The complete raw data and calculations are available for download here. I would appreciate any suggestions readers might have to improve PE comparisons.
Quality Matrix Plot
The quality matrix is presented graphically in the stacked bar chart above with cumulative inputs for each factor. Based on this analysis, the most favorable investments in the group are likely to include:
- Taiwan Semiconductor Manufacturing Company Limited ( TSM )
- Qualys, Inc. ( QLYS )
- Qorvo, Inc. ( QRVO )
- Paycom Software, Inc. ( PAYC )
- Wipro Limited ( WIT )
Quality Matrix Limitations
Investors should consider the value matrix a screen only. Notably both PE factors and the % below 52WK High factor reference historical data for each stock individually. While these factors indicate that an individual stock is cheaper than that stock has been historically, they may not reliably reflect value with relation to the Information Technology sector as a whole. The matrix and its factors, normalization method, and weights could all be adjusted and yield different results. Further, the matrix is based on the most readily available and common metrics. These metrics can change rapidly with share price or as new company reports are released. The value matrix does not include company-specific data available in quarterly reports and presentations.
Conclusions and Recommendations
The value matrix is a blunt instrument; finesse, judgement and discernment are left to investors. Investors are advised to consider the value matrix as nothing more than a starting point for their own due diligence. Nonetheless, a higher value matrix score indicates an investment with a favorable combination of the factors considered (PE vs 5YR average PE, 1YR PE Change, % Below 52WK High, Net Profit Margin, and Debt/Equity) relative to its peers.
Investors are once again cautioned to consider every investment carefully and on its own merits.
Information is a source of learning. But unless it is organized, processed, and available to the right people in a format for decision making, it is a burden, not a benefit. - William Pollard (Physicist and Theologian)
For further details see:
Selected Information Technology Stocks Ranked By Value