Harry Domash's Winning Investing



Finding Hot Tech Stocks

Technology stocks are hot and likely to continue their winning streak for some time.

As you probably know, CNBC is the leading stock market focused cable channel. However, you may not know that CNBC’s website offers a capable, and free, user friendly stock screener. Here’s how to use it to find tech stock candidates.

Find the screener from CNBC’s homepage (www.cnbc.com), by selecting Investing, then Stock Screener, and finally Custom Screener. The Custom Screener groups its screening selection parameters in categories that you select using a dropdown menu. Start by using that menu to select “Company Overview.”

Define Candidate Universe

Select ADR and specify “False” to limit your list to U.S.-based stocks. Why? The U.S. market is more tightly regulated than many and sticking with U.S.-based stocks will cut your risk. Then, using the Sector parameter (you may have to scroll down to see it), specify “Technology.” 

Next, still in the Company Overview category, specify greater than 5000 ($5 billion) for “Market-Cap” (market capitalization), which is the value of all outstanding shares. Doing that confines your list to lower-risk, already well-established firms.

Isolate Fastest Growers

The best tech candidates have already established strong growth track records and are expected to maintain those historical growth rates for at least the next 12-months.

To isolate the fastest historical growers, select the “Growth Trends” category and specify greater than 20 percent for both 12-months earnings growth (EPS–1 Year Growth) and 12-months revenue growth (Current Revenue Percent Change YOY).

To assure that analysts are expecting continued strong growth, select the “Analyst Estimates” category and require greater than 20 percent for estimated current year earnings growth (Estimated EPS Growth Current Fiscal Year).

As a double-check, still in the Analyst Estimates category, specify “Buy” for (analyst) consensus recommendation to assure that analysts covering the stock are still positive about its prospects.

Don't Be Too Late to the Party   

It’s important to check valuation to assure that you’re not arriving too late to the party. The price to earnings ratio (P/E), which compares share price to annual per-share earnings (EPS) is a popular valuation gauge. However, tech stocks often report big quarter-to-quarter EPS swings, distorting the P/E ratio. Consequently, the price to sales (P/S) ratio, which compares price to sales, expressed on a per-share basis, is a more reliable valuation gauge.

For most stocks, price to sales ratios above five would signal an overpriced stock. But stocks with double-digit growth rates, especially tech stocks, typically trade at much higher valuations. Select the Valuation category and specify “less than 15” for “Price to Sales.”

Avoid High-Debt

Some tech stocks take on significant debt to finance growth. For them, debt servicing costs could squash earnings, especially in a rising interest rate environment, which some analysts expect to happen next year. The debt to equity ratio (D/E) is a reliable debt measure. Zero D/E ratios signal no debt, and the higher the ratio, the higher the debt. In the Financial Strength category, specify “less than one” for Debt to Equity (long-term).

Six Hot High-Tech Prospects

My screen listed six tech stock candidates.

Adobe Systems (ADBE): Analysts expect the king of desktop publishing to grow EPS by 40% and revenues by 24% in 2017.

Arista Networks (ANET):  Forty-five percent year-over- year revenue growth is expected to translate to 60% higher EPS in 2017 for this networking equipment maker.

Facebook (FB): Analysts are forecasting 46% revenue and 68% EPS growth for Facebook this year.

Fortinet (FTNT): Analysts expect this leading security software producer to generate 40% EPS growth on a 17% gain in revenues this year.

MKS Instruments (MKSI): Automated manufacturing is a hot item and MKS provides the equipment needed to do the job. Analysts expect 98% annual EPS growth on a 47% gain in revenues.

NVIDIA (NVDA):  Automated manufacturing, self driving automobiles, artificial intelligence... you name it and NVIDIA makes the chips. Analysts are looking for 63% EPS and 37% revenue growth this year.

As always, consider the stocks listed by this screen as research candidates, not a buy list. The more you know about your stocks, the better your results.

published 11/27/17

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