What are we looking for?
Information technology companies with robust fundamentals and lagging stock prices.
U.S. tech stocks are famous for their incredible performance and lofty valuations. They tend to be burdensome to evaluate, given their high growth and intangible nature. We will mitigate this issue by looking at them on a relative basis instead. We will compare their stock returns over the past three months and highlight the outliers.
The screen (add this screener here)
We screened U.S. stocks focusing on the following criteria:
· Market capitalization higher than US$1-billion;
· A StockPointer (SP) score of 60 or higher. The SP score is a complex composite that focuses on quality and value. The score varies between zero and 100. A score of more than 60 is considered higher than average;
· Three-month change in the SP score higher than 1 per cent. This is our main criterion to measure the short-term attractiveness of a company;
· Return on capital higher than 15 per cent. IT companies generate tremendous cash flow compared to their capital. We increase our ROC standard to reflect it;
· One-year sales growth higher than 5 per cent. We want to eliminate low-growth companies from the screen.
For informational purposes, we have also included three-month and one-year price returns, P/E ratio and dividend yield. Please note that some ratios may be shown as of the end of the previous quarter.
More about Inovestor
Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisors can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports.In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks, and American depositary receipts).
What we found
Information technology companies
| TICKER | NAME | PRICE | MKT VALUE (US$ MIL.) | SP SCORE | 3M SP SCORE CH. | 1Y SALES GRTH. (%) | ROC (%) | 3M PRICE RTN. (%) | P/E | 1Y PRICE RTN. (%) | DIV. YLD. (%) |
| ATEN-N | A10 Networks, Inc. | 15.23 | 1180 | 61 | 38.6 | 8.4 | 27.9 | 10.0 | 12.8 | 90.9 | 1.3 |
| CALX-N | Calix, Inc. | 68.04 | 4336 | 63 | 26.0 | 37.0 | 41.5 | 43.0 | 17.7 | 187.3 | – |
| ZM-Q | Zoom Video Communications | 220.21 | 65408 | 61 | 3.4 | 170.1 | 25.3 | -35.4 | 63.9 | -54.0 | – |
| NFLX-Q | Netflix, Inc. | 665.64 | 294847 | 62 | 3.3 | 20.2 | 17.3 | 21.0 | 58.4 | 35.7 | – |
| NATI-Q | National Instruments Corp. | 42.98 | 5700 | 67 | 3.1 | 11.4 | 16.6 | 3.8 | 106.1 | 14.8 | 2.5 |
| KLAC-Q | Kla Corp. | 398.96 | 60541 | 73 | 2.8 | 25.9 | 33.2 | 19.5 | 22.4 | 58.3 | 1.1 |
| QRVO-Q | Qorvo, Inc. | 148.11 | 16360 | 61 | 1.7 | 29.3 | 15.4 | -20.3 | 15.0 | -5.5 | – |
| APPF-Q | Appfolio Inc Class A | 120.41 | 4171 | 63 | 1.6 | 10.2 | 52.5 | -1.3 | 2254.7 | -26.1 | – |
| PYPL-Q | Paypal Holdings Inc | 187.79 | 220465 | 64 | 1.6 | 22.9 | 21.8 | -31.4 | 44.6 | -12.3 | – |
| POWI-Q | Power Integrations, Inc. | 102.38 | 6176 | 67 | 1.5 | 50.7 | 19.0 | -2.8 | 40.9 | 43.4 | 0.6 |
| GOOGL-Q | Alphabet Inc. Class A | 2843.66 | 1890130 | 69 | 1.5 | 39.6 | 23.0 | 0.5 | 27.0 | 62.1 | – |
| AAPL-Q | Apple Inc. | 156.81 | 2575884 | 70 | 1.4 | 33.4 | 40.2 | 6.3 | 27.7 | 31.7 | 0.6 |
| MSFT-Q | Microsoft Corp. | 329.68 | 2475231 | 70 | 1.4 | 19.8 | 24.9 | 10.2 | 36.6 | 54.0 | 0.8 |
| SWKS-Q | Skyworks Solutions, Inc. | 152.48 | 25190 | 73 | 1.4 | 52.3 | 30.1 | -15.7 | 16.8 | 8.0 | 1.5 |
A10 Networks Inc., a provider of secure application services and solutions, has the highest three-month SP score change – an increase of 38.6. On the other hand, the stock price increased by just 10 per cent during the period. The company has relatively low one-year sales growth of 8.4 per cent, and it has a P/E of just 12.8. Both metrics are the lowest of our screen, which balances things out.
At the end of 2019, A10 Networks founder Lee Chen stepped down as CEO and was replaced by Dr. Dhrupad Trivedi. Since then, the company has slashed its costs while maintaining its revenue and now seems focused on revenue growth.
The company has an interesting story as well as operating in a compelling industry.
PayPal Holdings Inc., a digital payments company, has negative price momentum with a three-month price return of -34.9 per cent, and the one-year metric stands at -12.3 per cent. Investors seem to be worried about increased competition from e-commerce giants, including Shopify Inc. and Amazon.com Inc., as well as more direct competitors such as Square Inc., another digital payments company. It bought Afterpay Ltd. – a buy now, pay later platform – in August.
However, over the past three months, PayPal’s SP score increased by 1.6, driven by a lower valuation and results in line with historic growth. The market moved before fundamentals, which is not unusual, but considering the magnitude of the share price decline, the market could be too confident in the outcome without seeing it.
Electronic components manufacturer Power Integrations Inc. has a plenty of notable attributes. They include a respectable SP score of 67, an increase of 1.5 over the past three months. The company has also been ignored by the market over this period, with a price return of -2.8 per cent, although it has a reasonable one-year performance of 43.4 per cent, which shows robustness, but no excessiveness.
The company has the third-highest sales growth on our list, at 50.7 per cent, and pays a dividend of 0.6 per cent.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/
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