Over the past few weeks we have discussed the embedded expectations for sales growth that is “priced-in” to the current trading level of the S&P 500 index as well as the expectations embedded in each individual sector within the index. We concluded that the S&P 500 as a whole looks close to fairly valued and that there are still an ample amount of attractive investment opportunities within the index. On a sector level, we concluded that the sectors with the lowest expectations for sales growth relative to the growth that they have delivered historically were Healthcare, Transportation and Technology.
Investors can gain an advantage by understanding the current expectations embedded in a sector or index when searching for investment ideas or allocating across sectors. By focusing more time and effort on the most undervalued sectors with the most reasonable expectations for growth priced in, an investor’s pool of potential constituents will theoretically contain more companies that are likely to deliver adequate returns.
Being that we have identified the Technology sector as one of the sectors with the lowest expectations for sales growth priced-in to its current trading levels, we will dig into this sector and identify some individual companies with reasonable expectations. While it is an effective resource to understand “priced-in” expectations, it is only one of the tools that we utilize to uncover undervalued stocks that are likely to outperform. AFG’s Investment Grade™ methodology is a multi-factor, weighted stock grading model that takes into account many of the other factors we consider essential to properly value individual stocks as investment opportunities. This model attaches a simplified letter grade from A to F to each company in our database to help clients quickly understand how attractive a company is based on valuation, quality and momentum factors.
The chart below is a list of firms from the Technology sector of the S&P 500 identified by our Investment Grade™ model as having a grade of A or B. These companies also have very reasonable expectations for sales growth “priced-in” to their current trading levels, relative to what these firms have delivered in sales growth historically. Based on extensive back-testing, companies that meet the criteria to earn an investment grade of A or B that also have reasonable expectations have proven to be more likely to outperform. We believe this list can serve as a solid starting point for investors looking to add some Technology exposure to their client portfolios.
To learn more about how we help hundreds of institutional investors refine their investment process, email us at firstname.lastname@example.org. Or sign up for our monthly newsletter which contains market commentary as well as investment ideas, click here to subscribe.