Among U.S. companies that made the “High-Tech Screener,” three of them are application software companies: Accenture PLC (ACN, Financial), F5 Networks Inc. (FFIV, Financial) and Check Point Software Technologies Ltd. (CHKP, Financial). These companies had strong returns during the backtesting period from September 2006 to September 2016. As these companies have high financial strength and profitability, the application software industry offers potential for strong portfolio returns in the short term.
Three ranks to summarize value potential
GuruFocus provides the financial strength rank and the profitability rank for each company within its data coverage on the company’s summary page. The predictability rank is conveniently listed underneath the company name. The financial strength and profitability ranks range from 1-10 while the predictability rank ranges from 1-5. Each of these three ranks measures how likely the company will generate high returns in the short term.
The financial strength rank measures the strength of a company’s financial outlook based on its interest coverage and Altman Z-score. Companies that have low debt burden and strong F, Z and M scores likely have high financial strength. On the other hand, companies that have high debt burden have a low financial strength rank. Generally, companies with rank 7 or higher are unlikely to fall into distress while those with ranks lower than 4 face potential bankruptcy risk.
On the other hand, the profitability rank measures how profitable a company is and how likely the company’s business will remain profitable. Several factors, including the operating margin and the Piotroski F-score, determine the company’s profitability rank. Companies with rank 7 or higher generally have strong, sustainable profitability. A rank 3 or lower suggests that the company struggled to make profits in recent years.
As discussed in the research article, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) invest primarily in companies that have predictable earnings and revenue growth. The predictability rank measures how predictable the company’s earnings are during the past 10 years. Companies that have consistent per-share revenue and EBITDA growth likely receive at least a four-star predictability rank.
The distribution of financial strength ranks for companies trading on the New York Stock Exchange and the Nasdaq is roughly symmetric with a mean of 5.3, a median of 5 and a standard deviation of 1.61. The distribution of profitability ranks has a slightly wider range: its mean, median and standard deviation is 5.33, 6 and 2.02, respectively.
Unlike the prior two distributions, the distribution of predictability ranks for NYSE and Nasdaq companies is strongly right-skewed: about 81.3% of companies have a one-star predictability rank. Based on the following table, just 8.19% of companies have a predictability rank of at least four stars.
| Predictability Rank | Frequency | Percentage |
| 1★ | 2999 | 81.30% |
| 2★ | 76 | 2.06% |
| 2.5★ | 92 | 2.49% |
| 3★ | 127 | 3.44% |
| 3.5★ | 93 | 2.52% |
| 4★ | 109 | 2.95% |
| 4.5★ | 89 | 2.41% |
| 5★ | 104 | 2.82% |
Tech companies among high-ranked stocks
The “High-Tech Screener” lists the companies that meet the following criteria:
- The screener considers only information technology companies and excludes all over-the-counter stocks.
- Both the financial strength rank and the profitability rank are at least 7.
- The company has at least a four-star predictability rank.
Seventeen companies, including Accenture, made the above list. The Irish professional service company has a financial strength rank of 8, a profitability rank of 9 and a five-star predictability rank. The company has four good signs, including expanding operating margins and consistent per-share revenue growth. Currently, the company’s operating margin, net margin and return on assets are near a 10-year high, and its return on equity outperforms 97% of global information technology services companies.
Unlike Accenture, which also has five medium warning signs, F5 Networks only has two medium warning signs. The Washington based software company has the same ranks as does Accenture: financial strength rank 8, profitability rank 9 and predictability rank 5-star. Additionally, F5 Networks has no debt, and its three-year revenue growth rate ranks higher than 76% of global infrastructure companies. A previous article further discusses F5 Network’s strong business operation. Additionally, the article discusses tech giant Apple Inc. (AAPL, Financial), one of Buffett’s major holdings.
While Check Point Software only has a four-star predictability rank, the company has a financial strength rank of 9 and a profitability rank of 10. Like F5 Networks, Check Point Software has no debt. The Israel-based company has seven good signs, including the four that all three companies share: high F-scores, strong interest coverage, expanding operating margins and consistent per-share revenue growth. Unlike the other two companies, Check Point Software has no warning signs. Its price-earnings ratio and price-to-sales ratio are near a three-year low while its price-to-book ratio is near a 52-week low.
During the backtesting period from September 2006 to September 2016, the “High-Tech Screener” generated an overall return of at least 200%, outperforming the Standard & Poor’s 500 index exchange-traded fund by over 130%. The following backtesting results table assumes yearly rebalancing and a maximum of 10 stocks.
| Year | SP 500 ETF | Financial Strength DESC | Profitability DESC | Predict DESC |
| 2006 | 10.11% | 10.11% | 10.11% | 10.11% |
| 2007 | 3.24% | 9.85% | 14.05% | 15.52% |
| 2008 | -38.28% | -18.68% | -19.50% | -30.40% |
| 2009 | 23.49% | 46.69% | 61.14% | 60.39% |
| 2010 | 12.84% | 20.31% | 21.83% | 18.33% |
| 2011 | -0.20% | 5.13% | 7.26% | 8.06% |
| 2012 | 13.47% | 1.16% | 2.71% | 8.32% |
| 2013 | 29.69% | 35.81% | 41.37% | 32.16% |
| 2014 | 11.29% | 20.18% | 21.46% | 16.61% |
| 2015 | -0.81% | -4.39% | 7.14% | 6.66% |
| 2016 YTD | 5.58% | 4.14% | 5.16% | 6.62% |
| Overall | 63.79% | 200.02% | 322.98% | 244.70% |
See also
As discussed in previous articles, predictable companies generally outperform the unpredictable companies. Several value screeners only consider companies that have at least a four-star predictability rank, including the following:
| Screener Name | Code | Comments | Model Portfolio Performance of top 25 companies |
| Undervalued Predictable | UVP | Based on the DCF model | 187.35% |
| Buffett-Munger | BFM | Based on their four-criterion approach | 150.88% |
| Historical Low P/S | LPS | P/S less than 30% of historical low | 116.54% |
| Historical Low P/B | LPB | P/B less than 30% of historical low | 115.03% |
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Disclosure: The author has no position in any of the stocks mentioned in this article.
