Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.
What are we looking for?
According to RBC Dominion Securities, when the economy picks up and rates begin to drift higher, the technology sector tends to outperform. My colleague Rob Belanger and I thought we would take a look at North American information technology stocks.
The screen
Our companies had to have a market capitalization greater that $1-billion.
The EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is one of the most commonly used valuation metrics. We are looking for a low number and all our companies had to be less than 12.
The net debt to EBITDA shows how many years it would take a company to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative, which effectively means debt could be paid immediately. Only companies with net debt to EBITDA of less than one made our screen.
Operating profit margin (OPM) indicates how much profit a company makes after paying for the costs of production, and is indicated as a percentage of sales. To be included, companies had to increase their OPM by more than 10 per cent.
Price to free cash flow (P/FCF) compares a corporation's stock price to its free cash flow. A high ratio indicates that the stock price is expensive relative to its cash flow. A smaller ratio is preferred and only companies less than 20 times are shown.
Price to book (P/B) examines a stock's market value relative to its book value. This ratio gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately. All companies had to have a P/B less than three times.
Price to sales (P/S) compares a company's stock price to its revenues. A low ratio may indicate an undervalued company. Only those less than four times are included.
What did we find?
Based in San Jose, Calif., Brocade Communications Systems Inc. is one of two companies that scored better than the averages in five of the six categories. Brocade provides Ethernet, storage and networking services in 160 countries. The other company is Cisco Systems Inc., also in San Jose, which designs, manufactures and sells networking equipment. Honourable mentions go to CA Inc., Amdocs Ltd., and Marvell Technology Group Ltd.
Contact an investment professional or conduct further research before investing in any of the companies mentioned here.