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Summary Four key factors are reported across industries in the technology and telecom sectors. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow a certain number of fundamental factors for every sector to compare them to historical averages. This article covers technology and telecommunications. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research by reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by portfolio123 are extracted from the database: price/earnings (P/E), price to sales (P/S), price to free cash flow (P/FCF), and return on equity (ROE). They are compared with their own historical averages ” Avg .” The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name. For example, D-P/E = (AvgP/E – P/E)/AvgP/E. It can be interpreted as a percentage in underpricing relative to a historical baseline: the higher, the better. It points to overpricing when negative. ROE is already a percentage. A relative variation makes little sense. That’s why we take the simple difference: D-ROE = ROE – AvgROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. Industry valuation table on 12/8/2015 The next table reports the four industry factors. For each factor, the next “Avg” column gives its average between January 2001 and October 2015. It excludes the dot-com bubble and may be taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are three columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Internet 59.55 38.33 -55.36% 3.58 2.93 -22.18% 34.55 29.72 -16.25% -24.54 -26.83 2.29 IT Services 27.53 23.34 -17.95% 1.54 1.16 -32.76% 20.69 18.68 -10.76% 10.25 2.42 7.83 Software 42.9 33.79 -26.96% 4.17 2.81 -48.40% 35.12 23.95 -46.64% -10.77 -8.17 -2.6 Communications Equipment 33.73 28.48 -18.43% 1.42 1.61 11.80% 24.56 24.1 -1.91% -2.79 -9.61 6.82 Computers & Peripherals 20.86 24.67 15.44% 1.26 1.24 -1.61% 20.87 21.68 3.74% -12.67 -8.33 -4.34 Electronic Equipment 21.54 21.26 -1.32% 1.29 1.3 0.77% 22.54 21.35 -5.57% 1.27 -1.77 3.04 Semiconductors* 29.16 31.77 8.22% 2.43 2.41 -0.83% 31.92 28.86 -10.60% 1.47 -1.34 2.81 Diversified Telecom Services 24.42 19.95 -22.41% 1.64 1.2 -36.67% 26.64 23.83 -11.79% 0.93 -11.97 12.9 Wireless Telecom Services 21.01 27.57 23.79% 1.04 1.75 40.57% 46.5 31 -50.00% 3.22 -14.25 17.47 * Averages since 2003 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality (ROE) Relative Momentum The next chart compares the price action of the Technology Select Sector SPDR ETF ( XLK ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion XLK has outperformed SPY by about 5% in the last three months. On this period, the five best performing S&P 500 tech/telecom stocks are Autodesk (NASDAQ: ADSK ), Activision Blizzard (NASDAQ: ATVI ), KLA-Tencor (NASDAQ: KLAC ), Nvidia (NASDAQ: NVDA ) and SanDisk (NASDAQ: SNDK ). ADSK and ATVI have hit an all-time high recently. IT services, software, computers and peripherals have improved their valuation factors since last month. Electronic equipment and semiconductors look good, with fair valuation factors and a quality factor above the historical average. Wireless telecom services also are above their average quality, and two valuation factors out of three point to underpricing. The software industry looks like the weakest one from a fundamental point of view, with all metrics in negative territory. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in technology beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “follow” tab at the top of this article. Scalper1 News
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