Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. mike@mikebowmangroup.com
What are we looking for?
Last year, 72 per cent of adult Internet users surveyed in North America said they spend 20 per cent of their computer time on social media websites – double the amount from five years earlier – according to Global X Funds. With increasing Internet penetration, advertising revenues of social media websites are expected to grow by 20 per cent per year over the next two years and beyond.
My colleague Rob Belanger and I thought we should take a look at the sector.
The screen
We ranked our companies by market capitalization from the largest to the smallest and excluded any company with a market cap smaller than $1-billion.
EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is one of the most commonly used valuation metrics. We are using analysts' estimates for the next 12 months, and are looking for a low number.
PEG is the price-to-earnings ratio (P/E) divided by the growth rate of its earnings. The lower the PEG ratio the more the stock could be undervalued.
EBITDA margin is a measure of a company's operating profitability. It is EBITDA divided by total revenue and gives a cleaner view of a company's profitability.
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. A high number is preferred.
Return on equity (ROE) shows whether a company is a profit creator or a profit burner, and if it is growing profits without pouring new capital into the business. It indicates how much profit the company generates with the money shareholders have invested. We look for a high number.
What did we find?
One company stands out above the rest, and that is King Digital Entertainment PLC. This Dublin-based company with shares trading on the NYSE is a leading interactive entertainment company for the mobile world. King Digital has more than 180 fun titles, like the popular Candy Crush Saga, in more than 200 countries with an average of 352 million monthly users. King leads our screen in four of the five categories.
Contact an investment professional or conduct further research before investing in any of these companies.