By Philip van Doorn
So far, 2022 is a year of value stocks. But some tech stocks fit that definition.
Below is a high-conviction list of technology stocks among the S&P 500 /zigman2/quotes/210599714/realtime SPX +3.06% that have low valuations to earnings estimates and high free cash flow yields. They’re all highly rated by analysts.
Growth stocks — those of companies increasing sales rapidly that tend to trade high relative to earnings estimates — were at the forefront of the bull market, which has arguably ended as investors prepare for an expected cycle of interest-rate increases by the Federal Reserve to combat high inflation.
The $24 billion iShares S&P 500 Value ETF /zigman2/quotes/206097129/composite IVE +2.75% tracks the S&P 500 Value Index, which includes a subset of the full S&P 500, scored by price-to-earnings, price-to-book-value and price-to-sales ratios.
IVE has pulled back 2% this year through Feb. 11, compared with a 12% decline for the $35 billion iShares S&P 500 Growth ETF /zigman2/quotes/208542267/composite IVW +3.47% .
A 10-year chart for the ETFs tells a different story:
Growth has shined over the past decade, which has mainly been a period of rapid growth for technology companies, reflected in high valuations to earnings.
But maybe things really are different now. It has been 40 years since inflation has been this high , and the Federal Reserve’s expected policy change can alter the stock market’s dynamics for years.
This year’s decline in stock prices — especially the 11% pullback for the S&P 500 information technology sector — has moved some companies into the value camp, as you can see in the following screen.
Tech value stock screen
Analysts at Jefferies did their own screen for value stocks among the entire S&P 500 and discussed their results in a report to clients on Feb. 11. The Jefferies screen made use of the firm’s own ratings and estimates.
The Jefferies analysts confined their list to stocks their own firm rated “buy” and which also met these criteria:
A forward price-to-earnings ratio lower than the S&P 500 average for that sector.
A forward free cash flow yield higher than the S&P 500 average for that sector. A company’s free cash flow is its remaining cash flow after capital expenditures. It is money that can be used for expansion, to increase dividend payouts for for stock repurchases, which can reduce the share count and boost earnings per share. A company’s forward free cash flow yield is its free-cash-flow-per-share estimate for the next 12 months divided by the current share price.