Tech Stocks Tune-Up — 2 to Buy, 3 to Sell

by Jeff Reeves | March 21, 2012 6:00 am

information technology IT numbers fiber opticsTech stocks have been going like gangbusters in 2012. The clearest indicator of this success is the technology-focused Nasdaq index eclipsing the 3,000 mark for the first time since the dot-com bubble. The benchmark has added almost 20% in the past three months or so.

Some big-name tech stocks have done even better — such as Apple (NASDAQ:AAPL[1]), which is up 50% in 90 days.

But will the momentum in tech last, or is it time to do some spring cleaning to your portfolio?

A look at tech stocks reveals that the landscape of the sector is extremely varied. That means some stocks bumping up against Y2K highs should definitely be pared back — and investors who want to continue to focus on technology need to be more selective.

Here are two techs to buy this April and three more you should consider selling before they flop:

Tech to Sell: Microsoft

At $25 in late 2011, Microsoft (NASDAQ:MSFT[2]) was looking like quite a bargain. Now the stock is up more than 22% in the past three months and approaching a 52-week high … and appears a bit overbought.

The obvious long-term challenge Microsoft faces is the slow erosion of its Windows dominance because of tablet computers and smartphone capabilities. Microsoft also faces increased challenges from the “cloud” as the idea of shrink-wrapped software becomes obsolete. Beyond the threat of competition, the move also will hurt margins even if its own Office 365 cloud offering succeeds.

There’s also the aggressive but undisciplined investment in new businesses, with little synergies or immediate impact to the bottom line. Take the 2011 Skype deal for $8.5 billion[3], which has yielded little thus far beyond an unimpressive integration into Microsoft’s unpopular Windows Phone operating system.

That’s to say nothing of the “brain drain” as innovative minds seek out Apple, Facebook and other tech companies.

I’ll admit there were good reasons to bid up Microsoft stock from the mid-$20s. Broader improvement in the economy will help boost spending on information technologies, and its Xbox gaming system and Kinect hardware continue to succeed. And while the clouds are theoretically gathering on the horizon, you can’t really complain about $4 billion in operating cash flow on $20 billion in revenue last quarter.

But now that we are into the $30s? I say sell Microsoft and trade up for a better tech stock. The upside is limited from here.

Tech to Buy: Apple

So what should you trade in your MSFT shares for? I’ll start with the obvious pick, and I will be brief. I believe Apple remains a bargain even at $600 a share, with my top reasons being:

Tech to Sell: Amazon

Amazon AMZNAmazon (NASDAQ:AMZN[6]) is a perennial outperformer. Shares have more than doubled since pre-Lehman levels, and the company has reshaped e-commerce and the publishing industry as we know it.

But a forward P/E of 65 based on projected 2013 earnings of $2.86? That seems a bit rich — especially when you consider Amazon’s net profit is normally about 5% of revenue, thanks to rock-bottom pricing that’s squeezing competitors and giving AMZN its low-cost appeal.

The company actually is going to come dangerously close to break-even in its next earnings report because of the huge Kindle Fire gamble. The company is bleeding cash on the low-cost tablets in an effort to jump into the iPad-dominated market. Amazon’s research, production and subsidies for the tablet already resulted in a huge step back for fourth-quarter earnings and remain a drag on the bottom line.

Will the move pay off in the long run? Maybe. But in the short term, Amazon’s lack of transparency on Kindle sales figures should make some investors leery. In fact, one group of analysts said last year that the Kindle Fire actually will boost iPad sales[7] by familiarizing consumers with the technology and prompting them to eventually upgrade.

And now that an entry-level iPad 2 is just $399? The leap is easier to make then ever.

As with Microsoft, general economic recovery will bode well for AMZN via its e-commerce business. But if you’re expecting a quick rebound back to valuations near $250 a share … well, it’s not happening anytime soon. Rotate out of this tech giant and into other opportunities that have equal upside and less uncertainty.

Tech to Buy: Cerner

cernerLogo_185Medical software and technology stock Cerner (NASDAQ:CERN[8]) might not be a well-known name to most investors, but this $12 billion company is worth a look. After all, it’s up about 50% in the past 12 months — more than three times the broader Nasdaq — and has tripled in the past five years.

But don’t think this is just a fad stock riding the tech sector. Cerner is a fast-growing company because it helps health care companies and hospitals run their operations efficiently, but it also has big growth potential thanks to its reach into digital patient records. This is a true secular growth story[9] — with the baby boomer population increasing the need for companies serving the health care industry, and with technology steadily marching modern medicine into the digital age. Cerner is in the right place at the right time, plain and simple.

Yes, there always is the risk of competition. But as the pie gets bigger every year, that allows some room for error. And growth certainly hasn’t been a problem for CERN based on its track record — nine straight quarters of revenue growth and eight straight quarters of year-over-year profit increases. Forecasts are for another 22% in profit growth in 2012, too.

The valuation is a bit high on Cerner, at a P/E of about 28 based on fiscal 2013 earnings projections. But there are many reasons to expect this company to keep up its momentum.

Tech to Sell: Seagate

Seagate STXSince we are talking about secular growth, let’s also talk about secular slump in store for hard-drive companies like Seagate (NASDAQ:STX[10]). The demand for desktop, laptop and DVR technologies are going to go the way of VHS tapes in the next few years — and companies whose bread-and-butter are these components will face pressures.

Investors might be fooled into thinking that Seagate is safe because of recent sales and profits numbers — but don’t buy it. The fact is flooding in Thailand late last year seriously hurt rival drive manufacturer Western Digital (NYSE:WDC[11]) and allowed Seagate to command unusually high prices for its products and unusually brisk volume.

The results have helped fuel a jaw-dropping 60% gain year-to-date in STX stock.

Bulls will point to an ultra-low P/E of well under 5 right now based on 2013 earnings of $5.83 a share … but don’t get sucked in. The long-term threats to STX are going to be very difficult to combat — and in the short term, the earnings juice from its competitors’ missteps is not the same as sustainable growth in Seagate’s bottom line.

If you own this stock, take your profits off the table now and head for the hills.

If you don’t own it? Maybe consider playing the downside. Seagate is due for a crash just like those antiquated disk drives it likes to peddle.

Jeff Reeves is the editor of, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[12] Write him at editor@investorplace?.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned stocks.

  1. AAPL:
  2. MSFT:
  3. the 2011 Skype deal for $8.5 billion:
  4. Apple’s new dividend:
  5. “new iPad”:
  6. AMZN:
  7. Kindle Fire actually will boost iPad sales:
  8. CERN:
  9. true secular growth story:
  10. STX:
  11. WDC:
  12. “The Frugal Investor’s Guide to Finding Great Stocks.”:

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