Sizing up the wealth creators among U.S. technology stocks

In the filter created this week for The Globe and Mail, we screened for Wealth creators in the U.S. information technology sector.

Signals indicating a nearing bear market have been encircling us for months. In periods such as these, fundamental analysis is key; we’re looking for real quality that can protect one’s portfolio. With U.S. technology stocks taking a particularly big hit recently, I decided to make that sector our focus. We screened the U.S. information technology sector by focusing on the following criteria:

  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA gives us a sense of how much value this stock is adding for shareholders and is calculated by taking the net operating profit after tax and subtracting the capital expense;
  • Positive EVA/share, and EVA/share growth over 12 months;
  • Economic performance index (EPI) – the ratio of return on capital to cost of capital – must be greater than one;
  • Average five-year return on capital must be greater than 10 per cent and the 12-month change in return on capital must be positive;
  • Future growth value/market value (FGV/MV) and its 12-month change. This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
  • Beta – this gives us an idea of how closely the company mimics the market’s fluctuations. A beta of less than one would indicate the stock is less volatile than the market at large.

Read more in this article written by Noor Hussain, Analyst & Account Executive at Inovestor Inc.