It's time we add a new subsector to technology. Along with hardware, software
and chips, the latest category could well be "Victims of Apple and Google."
As the two monsters of innovation grow more dominant, many other companies are
seeing their products and services marginalized. The result has been an
expanding roster of stocks that investors need to avoid despite their tempting,
single-digit P/E ratios. These companies, while very different in terms of their
individual business, are similar in that their inability to adapt leaves little
room for significant near-term appreciation in their stock prices. Cheap stocks
that need to be put on investors' "don't buy" list are: That these
companies represent such a broad swath of the technology sector illustrates the
reach and dominance of Apple (NASDAQ: AAPL ) and Google (NASDAQ: GOOG ). Below
is a brief comment on each of the six companies: PC Components "The tablet
effect is real," Hewlett-Packard (NYSE: HPQ ) CEO Leo Apotheker said last
week, but that isn't news to makers of PC components. On Monday, NPD reported
that PC sales grew just 4% year-over-year in the quarter ended July, while Mac
sales rose 26% in the same period. The Taiwan-based PC manufacturer Acer just
reported the first quarterly loss in the company's history, and Applied
Materials (NASDAQ: AMAT ) cited a significant downturn in July PC sales in
offering up a gloomy outlook in its post-earnings call Wednesday night. This
news isn't particularly surprising given the growth in tablets and
smartphones. UBS raised its estimates for total tablet sales to 60 million in
2011 and 84.1 million in 2012, with Apple holding a dominant 63% share of the
market in both periods. Meanwhile, the market research firm IMS Research
estimates that global smartphone sales will rise to 1 billion units by 2016.
These trends have put the pressure on the makers of hard-disk drive and DRAM
chips, as evidenced by the year-to-date returns of Seagate (NASDAQ: STX , -27%)
and Micron (NASDAQ: MU , -34%). Both of these stocks look cheap, but their
shares are likely to remain weak as long as PC sales continue to be affected by
tablet and smartphone sales. For now, the best bet is to avoid stocks whose
fortunes are tied to the PC industry due to the competitive pressures posed by
smartphones and tablets. Instead, consider stocks that can benefit from the
growth in these areas, such as Qualcomm (NASDAQ: QCOM ) and ARM Holdings
(NASDAQ: ARMH ). At a difficult time for the tech sector as a whole , investors
should have a laser-like focus on the winners rather than hoping for a miracle
in the sector's most beaten-down names. Mobile Phone Producers The downturn in
the fortunes of Nokia (NYSE: NOK ) and Research in Motion (NASDAQ: RIMM ) are
well documented. The most important takeaway from the endless discussion about
these two stocks is their falling market share. RIMM, for example, has seen its
U.S. market share fall from 33% to 12% in the past year. Nokia's European
market share has fallen from 55% to 11% in just two years, and Samsung (PINK:
SSNLF ) is rapidly closing the gap in the low-end market. It's possible that
RIMM's recently announced plan to make its newest products compatible with the
Android OS will help stem its market share losses in the year ahead. Still, it
is highly unlikely that either stock will embark on a sustainable recovery until
there is actual evidence that they are gaining back market share from Apple and
Google. Even with their exceptionally low valuations, neither stock should be
considered a buy until and if this occurs. Hardware Hewlett-Packard appears to
be an attractive value here, but what else is new? Its P/E has been in the
single digits for more than a year. The company, which last week announced it is
spinning off its PC business and mothballing its TouchPad, is now embarking on
an ambitious path to refocus its business on the services side. To be a buyer
here, you have to have faith that the company is on the right path, will execute
the transition effectively and will be able to compete effectively against IBM.
Not least, it will have to accomplish all of this under adverse economic
conditions. Keep in mind, this is the same company that in 2010 bought Palm for
$1.2 billion largely for its operating system WebOS, only to throw in the towel
a year later rather than compete against Apple's iOS and Google's Android.
Perhaps someday HP will be a buy as a turnaround story, but there needs to be
hard evidence that the company is gaining traction before its valuation moves
back into the double digits. Apotheker himself termed the transition process a
"multi-quarter journey." Based on the company's recent track record,
investors can be forgiven for not wanting to go along for the ride. Internet
Search Shares of Yahoo (NASDAQ: YHOO ) often are cited as a value on the basis
of a sum-of-the-parts analysis, but at a P/E of 14.95, investors still are being
forced to pay up to own a stock that has had its lunch eaten by Google in recent
years. Yahoo continues to deliver poor results, and it is showing little of the
vision needed to turn its business around. It's possible that one day the
stock will see a bounce on news of a break-up. However, CEO Carol Bartz's
track record raises the question of whether such a move can be executed quickly
and effectively enough to make an investment in Yahoo worth the risk even with
the stock down 29% from its high for the year. While the outlook is dim for the
companies on the victims' list, these are not stocks that investors should
short. The combination of beaten-down expectations, low P/Es and the possibility
of takeover activity makes these stocks dangerous to bet against. Still, the
possibility of takeover activity is offset by the much greater likelihood that
these stocks will remain value traps for some time to come. With so many
growing, innovative technology companies now offering compelling values in the
wake of the market's recent sell-off including, perhaps, Apple and Google
themselves there is no reason to tie up capital in any of the sector's
also-rans.
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