By Philip van Doorn
With another round of federal stimulus on the way and expectations for solid growth for the U.S. economy this year, value stocks have been rallying. Stocks with low valuations tend to do well during economic growth phases.
Mark DeCambre underlined the value rally by pointing out that the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.28% ended at a record high Dec. 10, while the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.04% was still in a correction.
But what about tech stocks? There’s plenty of value there too, as you can see in the screen below.
Economists polled by MarketWatc h expect the U.S. economy to expand by 6% in 2021. Yes, that’s coming off a 3.5% contraction in 2020, according to the latest estimate from the Bureau of Economic Analysis. But the 2021 growth rate would be the fastest since 1984, according to World Bank data.
Tech value stock screen
There are several definitions of value stocks, but generally they are those that trade at lower valuations to earnings and typically grow their sales at a slower pace. That said, an individual value stock might also be considered a growth stock. This is illustrated by the Russell indexes.
The Russell 1000 Index /zigman2/quotes/210598144/delayed RUI +0.65% is made up of the 1,000 largest publicly traded U.S. companies by market capitalization and is reconstituted each year in June. Selected from the Russell 1000 are the Russell 1000 Value Index /zigman2/quotes/210598148/delayed RLV +0.46% , which has 849 stocks, and the Russell 1000 Growth Index /zigman2/quotes/210598136/delayed RLG +0.84% , which has 453 stocks. The groups overlap, with 291 stocks in both. You can read how FTSE Russell describes the makeup of its indexes here .
So an easy way to play value at this time is to buy shares of an exchange traded fund that tracks the Russell 1000 Value Index /zigman2/quotes/210598148/delayed RLV +0.46% , such as the iShares Russell 1000 Value ETF /zigman2/quotes/206232959/composite IWD +0.48% or the Vanguard Russell 1000 Value ETF /zigman2/quotes/206196793/composite VONV +0.41% . As always, do your own research on any investment you consider to make an informed decisions.
For a large-cap technology value screen, we started with the information technology sector of the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.65% . Here’s how this sector’s weighted aggregate forward price-to-earnings ratio has increased over the past five years:
The sector’s forward P/E his risen to 25.4.
This doesn’t mean “expensive” tech stocks can’t be excellent investments. Salesforce.com /zigman2/quotes/200515854/composite CRM +1.03% was trading at a forward P/E of 68.7 five years ago, and the stock has nearly tripled since then.
Getting back to the S&P 500 tech value screen, we then added tech-oriented stocks in the communications services sector, including videogame developers and Facebook Inc. , Alphabet Inc. /zigman2/quotes/205453964/composite GOOG +0.86% , Netflix Inc. /zigman2/quotes/202353025/composite NFLX +0.30% and Twitter Inc. . That brought the list up to 82 stocks. Two of the videogame developers made the cut, but among the four companies named above, only Facebook had a low enough P/E to pass the screen.
Here are the 43 S&P 500 tech companies that trade below the tech sector’s forward P/E of 25.4:
Scroll the table to see all the data, including sales growth estimates and dividend yields.
A note about the data: The operating margin and sales growth figures for 2020 are marked “estimated” because many companies have fiscal years that don’t match the calendar. So the figures are based on consensus estimates for calendar 2020 among analyst polled by FactSet. For Micron Technology Inc. /zigman2/quotes/205710729/composite MU -2.63% , the 2020 sales growth figure is for the past four reported fiscal quarters through Dec. 3.