Are Technology Stocks In Trouble?

By Tim Parker | December 05, 2011 AAA
Are Technology Stocks In Trouble?

Sometimes the market seems to change its mind virtually overnight. What has been the longstanding rule for months, or even years, is replaced for what appears to be no reason at all. The technology sector of the market has gone through a rules change during the latter half of 2011, but does this signal a new trend?

TUTORIAL: Stock Basics

The Bellwethers
Every sector has its bellwether stocks that gauge its health. When the bellwether stocks are acting inconsistently with the overall market, investors take note and that has happened with technology bellwethers.

Take Apple (Nasdaq:AAPL), for example. Not only is Apple a technology bellwether, but it is regarded as one of the best run, fastest growing companies in the world. This makes Apple a bellwether for the entire market. With more than $84 billion in cash, Apple is the picture of health from a corporate finance perspective, but when it didn't meet Wall Street's overly ambitious expectations, the stock plummeted. In one day it lost 7% of its value; at the end of November, Apple was still down nearly 7% from its November high of $422.24.

Amazon, another technology bellwether, is down nearly 20% from its Oct. 14 high. Sixteen percent of that loss was a result of a disappointing third quarter earnings report. Although not a bellwether, Research in Motion (Nasdaq:RIMM), maker of the Blackberry phones, is a highly watched stock among investors. Since February of 2011, RIMM has lost an astonishing 76% of its value and is now regarded as being on life support and a possible takeover target. Even the newest Internet and tech stocks, like Groupon, have lost about 30% of their value since the IPO, and Netflix, the company that redefined the video rental market, has plunged 78% this year. (For related reading, see Corporate Takeover Defense: A Shareholder's Perspective.)

Old Tech
If you're a technology investor, you know that the old rule is that growth stocks are where your money is best placed. If it pays a dividend, it probably ran its course and now it's time to look for the next high flying up and comer. Just as the rules have changed for some of the bellwethers, the older more established technology stocks have caught the eye of investors.

Take Intel (Nasdaq:INTC), which has seen its stock soar over 20% since September of 2011. Add to that the current dividend yield of nearly 3.5%, it's no wonder that investors have found life in a once thought to be dead old tech name. Microsoft, largely overshadowed by Apple and other younger tech names, saw its stock gain 16% before giving much of it back. Still, due to new product launches and a resurgence of old technology names, both Microsoft and IBM have found life as the rules have changed.

Why the Change?
Ask five different market analysts and you're likely to get many different answers, but some of the reason may come from expectations. For example, Amazon (Nasdaq:AMZN) was trading at more than 100 times earnings at its height, and this attracted fair weather investors. Post a big quarter and these investors will give your company more money. Post a disappointment, and they'll find the next high flier.

Nobody can argue that the economy isn't allowing consumers to spend like they used to, so a bad quarter doesn't seem so out of line. However, when growth stocks hit headwinds, dividend payers like Intel, Microsoft (Nasdaq:MSFT) and IBM (NYSE:IBM), look a lot more attractive. In addition, analysts predict large scale business and enterprise spending, going forward, and when businesses start spending on tech, they go to the old tech names.

Bottom Line
Technology isn't dead or in trouble. Seeing the high profile names fall out of favor with investors may paint a picture of an ailing technology sector, but there is very little doubt that names like Apple will return to what they once were. When growth names underperform and the fundamentals of the company still look strong, this attracts the attention of value investors. (For related reading, see The Value Investor's Handbook.)

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