Information Technology is Where the Value Is

In the investment world, it is an accepted principle that there is a direct relationship between risk and reward. Generally, stocks of safe, slow-growing companies sell at lower valuations than risky, fast-growing ones.

But there is something unusual going on in the U.S. stock market these days. The risk/reward dynamic has broken down. The sectors of the market that are regarded as safe and conservative are trading at valuations equal to or higher than the sectors that are considered more aggressive and risky. The two sectors generally considered most conservative, consumer staples and utilities, are currently trading at 22 and 34 times earnings respectively. For slow but steady growing business lines such as laundry soap, beer, and electric power; these are historically high multiples.

In comparison, the information technology (IT) sector is selling at a similar earnings multiple of 23. In the long run, it is almost certain that IT will continue to be one of the most rapidly growing sectors of our economy. The digital revolution is affecting almost every aspect of our lives. For stock market investors looking for growing companies selling at reasonable prices, the technology sector now appears to present enticing relative value.

Here are some of the information technology stocks held in Group W accounts:

• Acacia Communications sells high-speed optical interconnect products to cloud infrastructure operators and communication service providers.
• Alphabet is the parent company of Google.
• Arista Networks is a supplier of cloud networking solutions.
• Arris International manufactures equipment for high-speed data and telephone systems.
• Fiserv develops software for financial institutions such as banks and broker-dealers.
• Microsoft is Microsoft.
• Resonant designs digital filters for cellular devices.
• Skyworks Solutions designs and manufactures power amplifiers and front-end solutions for cellular devices.

Though not without risk, these companies have tremendous growth potential and are currently selling at relatively modest valuations. Over the long-term, any investment portfolio will benefit from the inclusion of a diversified selection of IT companies.

Frederick Maxted - Group W Investment Management LLC                                                                                                                                                                  1 April 2017