Is the local IT sector too small to matter?

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The IT sector in Australia is a misnomer. In the US, this sector includes companies the like of Microsoft, Intel, Apple, Dell, HP and many more big game changers. It is the biggest sector in the US stock market. In Australia, our IT sector is dominated by a very good company – Computershare (CPU) – but it is a share registry business. There are only two IT companies in the top 100 and four in the top 200 listed in the table. The Australian IT sector is less than 1% of the ASX 200 by market capitalisation!

The sector does contain an interesting company – carsales.com – that has risen in share price by over 70% in the last year. But the sector is so small that investment in it or otherwise will have almost no effect on a portfolio that is to be compared to the benchmark ASX 200.

Only CPU passes the ‘2.5’ test (please see my paper on the Market Updates tab of our website www.woodhall.com.au for details) and only just! PE ratios are high by ASX standards. Yields are OK but not great and all have prices above the median target price.

Table: Data on companies in the ASX 100’s IT sector

 Turning to Chart 1, I plot the recommendations over time for the four ASX 200 companies. CPU, IRE (IRESS, one of the big data providers for financial analysts) and SMX have gone backwards – big time. Carsales (CRZ) has held its course despite its price growth./p>

Chart 1: Variation in consensus recommendations for selected stocks

The exuberance trace for this sector is shown in Chart 2. It is overpriced by more than we are comfortable with (above the 6% dotted line). We do have a thesis that there are dividend seekers exiting cash but this is not the sector for them to reside in. It is not as overpriced as some sectors – but at least those sectors are paying in excess of 5.5% yield, often with franking credits.

Chart 2: Exuberance in the IT sector

We have good prospects for the sector at about the ASX 200 average at +12% but being more than 6% overpriced – by our measures – there are better sectors to follow. At the moment, financials are just ‘buyable’ for yield, and big miners for capital growth.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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