dapper grisly: Struggling Tech Stocks

Gone are the days when technology stocks lit the stock boards on fire, driving the computer and Internet booms of the 1990s. Just as quickly as the boom happened, the investment community realized that profits are still more important than ?pazzaz?. As the millennium turned, so did the tide for tech.

apple nasdaq There were short stretches in the 2000s between the corrections of ?01-?03 and ?08-?09 and afterward when tech stocks stole the spot light again.

But since the latter part of 2012, these tech shooting stars have been slowly burning out and falling back down to Earth. Once again, they are stuck ?between inventions??that lull between innovative break-throughs.

Falling Demand

Tech companies as a group recently reported lower earnings by 5.5%, as both government agencies and consumers cut their budgets on technology. This compares to a 2.5% rise in the broader S&P 500 marketplace.

Analysts agree that consumer, corporate, and government demand for computers, electronics, and other technologies has been falling and will likely continue falling further.

Bloomberg quotes Peter Sorrentino:

?It is looking as though the economy is going to flatline for a while, after the disappointing numbers from China."

Sorrentino ?helps manage about $14.7 billion including shares of Google Inc. and Intel Corp. at Huntington Asset Advisors in Cincinnati,? according to Bloomberg. ?He sold Accenture Plc [NYSE:ACN] and Apple [NASDAQ:AAPL] shares last year.?

For its part, the International Monetary Fund has once again lowered its global growth projections?for the fourth quarter in a row?with China, Europe, and the United States all expecting slowdowns.

When times get tough, people realize their old phones still work fine and their TVs are still as big as they were when they first bought them. They don?t seem to be in so much of a hurry to upgrade as they once used to be.

Tech behemoth Apple?currently the second largest company by market value on the planet?is feeling just such a pinch, recently reporting that sales will be lower than expected for this quarter.

The company is also returning $55 billion to shareholders through dividends and stock buy-backs, indicating it really doesn?t have much in the pipeline or under development.

When companies return money to shareholders, they are in effect saying, ?We don?t really have any use for this money.? And that spells trouble.

Another sign that the latest tech wave has crested and is falling down the other side is International Business Machines (NYSE:IBM) missing its forecasts for the first time since 2005. It is also planning to cut jobs, which is yet another symptom of how ill the tech industry is.

Portfolios Are Re-Balancing

Throughout the sector, tech companies are missing estimates and lowering their projections going forward.

Walter Todd, CIO of Greenwood Capital Associates LLC summarized to Bloomberg:

?It has been nothing short of terrible in this space. We really need to see these downward revisions abate in the sector before you get sustainable outperformance.?

Robert Maltbie of Millennium Asset Management has a word of caution for holders of tech stocks. ?You don't want to own tech going into a summer slowdown,? he advised in USA Today.

As markets head into portfolio spring-cleaning, tech stocks can take a harder beating than others, as investors generally turn to the more defensive consumer staples.

Chief U.S. Equity Sector Strategist at Ned Davis Research, Lance Stonecypher, is outright bearish on tech. He told Barron's:

?We are downgrading the Technology sector to underweight from marketweight. Technicals have deteriorated considerably in recent weeks, with the S&P 500 Tech sector dropping to its lowest level since May 2009 relative to the market. In Q1, the sector underperformed by 580 [basis points], 300 bp of which came from Apple?s weakness. But now, the decline has become more broadbased, as the equal-weighted Tech sector also recently broke to new cycle lows.?

However, other analysts caution against throwing out the babies with the bath water. ?I?m as nervous about the large-cap tech growth stories as anybody, but I also think that they are getting to be really reasonable values,? James Paulsen of Wells Capital Management emphasized to Bloomberg.

At such low valuations, Paulsen believes the industry is a bargain, predicting technology stocks will rally as companies use excess cash to repurchase shares. Paulsen?s firm purchased more shares of Salesforce.com Inc. (NYSE:CRM) and Cisco Systems Inc. (NASDAQ:CSCO) late last year, according to his firm?s year-end filing.

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The Trouble with Success

The trouble with the technology sector is always the same, cycle after cycle. A new invention hits the market, lifting the potential value of companies in that new invention?s space. As a group, all stocks ride the wave of enthusiasm all the way to the top until that new invention is no longer new.

Once the love affair wears off, consumers settle into a more practical relationship with that new invention. And the same happens with that invention?s stocks?the sex appeal wears off and investors settle in with the expectation of a long-term committed arrangement.

This was seen with the introduction of personal computers in the mid-1980s, the Internet in the mid-1990s, and mobile devices from the 2000s until present. Almost all companies jumping onto each new invention flew high and strong for years.

Until the consumer?s relationship with that new tool became more practical. At that point, only those companies that were capable of providing practical long-term oriented products and services survived. Those companies that were selling only the sex appeal quickly fizzled away.

The trouble with success?especially for tech companies?is that they have to continually produce something fantastic, year after year, to dazzle consumers and steal their affections. They can do this for a few years, but ultimately the space gets saturated, the invention get old, and they run out of new ways to improve it.

As a case in point, Apple has introduced a series of cell phones, winning the adoration of consumers the world over. But after a while, consumers begin to realize that each new phone is not really new. A few extra bells and whistles, perhaps. But it?s still just a cell phone.

Tech companies are hopping across the river from stone to stone. When they run out of new inventions, they get stranded in the water. They need to spend more on research and development to introduce something that is really new. But R&D is awfully expensive to keep up long term.

Once flying as high as an eagle, the starlet on the world stage, each tech superstar eventually fizzles as it runs out of breakthrough products, re-enters the atmosphere and falls back down to Earth.

When investing in tech stocks, one might do well to research how many truly new products that company is developing. If it has nothing new in the works, nothing ground-breaking that will sweep the world off its feet and into their stores, then it might be time to take some profit and look for another tech company that is on the verge of the next big thing.

And just what might that next big thing in tech be? It just might be robots. Your next maid might be one!

Joseph Cafariello

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