Tech Companies Among High Value Stocks

Among companies trading on the New York Stock Exchange (NYSE) and the Nasdaq, information technology companies made multiple value screeners.

Two companies, Wipro Ltd. (WIT, Financial) and Baidu Inc. (BIDU, Financial), made four and three value screeners as of Oct. 4. This suggests that technology companies offer high value potential in the short term.

A recap on the value screeners

About two months ago, we resumed tracking which companies made the value screeners, as discussed in the respective article. Five of the value screeners implement a famous investor’s strategy to identify good companies. The “Power Five Investors” and their value strategies are summarized below:

• Ben Graham: The “Father of Value Investing” strikes high returns with a “bargain spade.” He invests in companies that have no meaningful debt compared to its cash, quantified as “interest coverage greater than 5” and positive operating cash flows during the past 12 months. Most important, these companies have a price to net-net working capital less than 0.67.
• Peter Lynch: The author of “One Up on Wall Street” looks for top buys with his earnings line, a powerful chart that identifies the undervalued companies based on earnings.
• Walter Schloss: A student of Graham, Schloss unearths companies trading at deep discounts. Such companies also have strong Altman Z-scores, good interest coverage and price to tangible book values under one.
• We will discuss the final two “Power Five Investors” together, as they are the well-respected co-managers of Berkshire Hathaway Inc. (BRK.A) (BRK.B): Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio). These two have joined forces to pick the top companies monthly (just look at their newsletters!). Additionally, their value screener only lists companies that meet their four-criterion approach to investing.

While the Undervalued Predictable Screener does not directly match a famous investor’s strategy, this screener gives an alternate perspective on the Buffett-Munger strategy. As the name implies, the screener lists the predictable companies that are undervalued based on the discount cash flow and discount earnings models. Two other value screeners list the predictable companies that have historical low price-book (P/B) ratios and price-sales (P/S) ratios.

Nearly all of these value strategies have outperformed the Standard & Poor’s 500 index during the backtesting period from 2009-2016, according to the page on model portfolios.

The value screener record as of Oct. 5

Over 500 Asian companies made Ben Graham’s net-net screener, suggesting that the Asian stock market is relatively undervalued. The total market to gross domestic product ratio for China is currently 49%, implying that the Chinese stock market is moderately undervalued. Based on Buffett’s indicator, the expected market return is about 30.8% per year.

The following table summarizes the value screener records.

The following table lists eight NYSE and Nasdaq companies that made at least two value screeners.

Although the Peter Lynch Growth screener only applies to certain industries, Wipro, Baidu, Discover Financial Services (DFS, Financial) and Gap Inc. (GPS, Financial) made the list when we considered all industries.

Two tech companies offer high value potential

Wipro made four value screeners as of Oct. 5, likely due to high financial strength and profitability. The application software company has six good signs, including expanding profit margins, consistent per-share revenue growth and valuation ratios near a five-year low. Even though the company has a poor Piotroski F-score of 2, the company has strong Altman Z-scores and returns on invested capital. Additionally, the company’s operating margin and return on equity outperform 84% and 82% of global IT services companies.

Despite declining profit margins, online media company Baidu still has a four-star predictability rank. The Chinese online company’s net margin and ROE outperform 97% and 94% of global Internet content and information companies. Baidu generally had increasing net margins during the past 10 years. Additionally, Baidu’s three-year revenue growth ranks higher than 90% of companies in its industry.

See also

As technology companies offer good investing opportunities, several gurus invested in the technology sector during the past three to six months. You can view these picks by clicking on Sector Picks and choosing the technology sector. You can also view the most active picks or the consensus picks of gurus.

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Disclosure: The author has no position in any stock mentioned in the article.

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