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Large price to earnings growth discount on UK technology stocks
Many UK technology stocks are not as expensive as they may at first appear, especially when current growth forecasts are taken into account. This is the finding of a study by investment bank Investec.
Its analysts found their universe of technology stocks were trading at a 18% discount to the wider FTSE All Share index, on a price to earnings growth or PEG multiple.
The Investec research, published on 31 January, found that technology stocks were trading on an average PEG ratio of 1.8, versus the FTSE All Share equivalent of 2.2.
The PEG ratio is worked out by dividing the price to earnings (PE) multiple by forecast earnings growth. Typically, lower PEG ratings imply that earnings growth is not being fully reflected in share price valuations.
Although it doesn’t include all technology stocks on the London market – Investec’s list focuses on the FTSE 350 constituents plus a wide selection of small technology firms – it does provide a fair overall view of the space.
Investec estimates average earnings growth in 2018 for its technology list of low-teens. The analysts believe that macro indicators are sound and that many business models are in good health.
The UK technology sector outperformed strongly through 2017.