When investors think of tech stocks, they usually think growth. And indeed tech stocks have provided some tremendous growth opportunities over the years; I’ve owned many of them over my decades of helping you find the best growth stocks. But this is not always the case — there are times when “tech” is not necessarily “growth.”
Technology has become so pervasive a part of our culture that it is now subject to the economic cycle, like all other industries. Businesses and consumers right now are reluctant to spend, and this weak global macroeconomic picture is reflected in the fundamentals of many tech stocks. Tech investors need to practice “buyer beware” in this environment — many of these stocks receive terrible rankings from Portfolio Grader and should be avoided.
F5 Networks (FFIV) is a name that has long been considered a growth stock, and investors have been trying to pick a bottom in the stock since early this year. The company remains a leader in application development controllers that help manage network traffic, but the market is stagnating right now. F5 is losing share in the low end of the market as companies are trending toward virtual ADCs … where the company is not as dominant. This trend is showing up in the company’s fundamentals. Earnings estimates for the next quarter and the rest of the year have been declining steadily for several months now. Portfolio Grader saw these trends developing back in October and lowered the stock to a “sell.” As conditions worsened, the stock was lowered to an “F” ranking in April and remains a “strong sell.”
Cloud computing has been the hot sector the past year or so and Salesforce.com (CRM) has been one of the hottest names in the sector. Research and development costs as well as stock-based compensation expenses have been rising and putting a damper on earnings and cash flow generation, and analysts have been lowering their expectations for the stock. Portfolio Grader noticed the deteriorating fundamentals and earlier this month dropped the ranking to “D” — a “sell” rating. Avoid trying to pick a bottom in the stock until fundamentals improve substantially.
As noted earlier this month, even industry pioneer and leader IBM (IBM) is not immune to the tech spending slowdown. The company is a leader in software, services and hardware for business, but that leadership is not translating to growth in the tough macro environment. The company posted its first earnings miss last quarter, and fundamentals have been steadily declining. The stock was downgraded to a “hold” back in December and in April was downgraded to a “D,” or “sell” ranking, in Portfolio Grader.
Tech does not always equal growth — and this is one of those times. Before trying to bottom-fish declining tech companies, be sure to use Portfolio Grader to check the fundamental rankings and outlook.
Louis Navellier is the editor of Blue Chip Growth.