by Jeff Reeves | July 25, 2013 8:17 am
So far in 2013, blue-chip tech stocks have been a big disappointment. Consider that the iShares U.S. Technology ETF (IYW) has underperformed substantially, up just 7% since Jan. 1 vs. almost 18% for the broader S&P 500 Index.
So what gives?
Well, broader headwinds to consumer and business spending persist in Europe, Asia and America. In Europe, it’s the continued hangover of a sovereign debt crisis and eurozone recession; in Asia, it’s the slowdown of the China growth engine; and at home, it’s a continued focus on efficiency at corporations and persistently high unemployment sapping consumer spending.
Couple that with the fact that technology, while grand, hasn’t really improved that much upon the models of the last year or two. I mean, if you have an iPhone 4 instead of an iPhone 5, is it really the same has having a landline telephone? Can’t you still send email and read spreadsheets on Windows XP instead of Windows 8?
As a result, tech stocks haven’t been able to see the explosive growth that many investors have hoped for. And looking forward, the headwinds will persist — and the underperformance will, too.
Don’t let your portfolio get left behind. If you own one of these five big-name tech stocks, consider selling now and moving your money elsewhere:
Microsoft (MSFT) sold off sharply after earnings thanks to a $900 million charge related to Surface tablet inventory adjustments and a big miss on profits.
And unfortunately, with continued headwinds in mobile and the decline of its Windows empire, this trend is going to continue for some time.
The tech giant still is up more than 19% year-to-date in 2013, is hoarding $77 billion in cash and boasts a 2.9% dividend yield … but don’t fall into the trap of thinking Microsoft is a bargain.
Despite posting more than $5 billion in profits, its quarterly earnings were down about $1 billion from the previous report. That’s not a rounding error.
Microsoft has a host of negative headlines across the last several months, including the loss of its CFO, the Xbox One is rolling out even as the division leader jumped ship and the threat of activist shareholders shaking things up.
Couple these distractions with mobile troubles and the secular decline of its PC-based businesses, and you have a tough road ahead for this tech blue chip.
Yahoo (YHOO) posted second-quarter earnings recently that were lifted by its stake in Chinese e-commerce and Internet giant Alibaba Group. But beyond that, the balance sheet was riddled with the same problems as always — no long-term vision, a reduced forecast for revenue and profit, and declines in ad rates thanks to a move to mobile.
Former Google (GOOG) exec Marissa Mayer has tried to turn around the struggling portal business of Yahoo as CEO, focusing on content, spending on acquisitions like the $1.1 billion Tumblr buyout. But beyond Alibaba, there’s not a lot going for YHOO since she took over.
Mobile is incredibly competitive, and the declining portal model in favor of social media outlets like Facebook (FB) means Yahoo has to swim upstream to grow traffic. Furthermore, online advertising margins continue to shrink, creating an ugly one-two punch.
Throw in the ill-timed $1.16 billion repurchase of a Third Point stake while the stock is bumping up against 52-week highs, and you have to wonder why the stock is up 38% year-to-date.
Sure, Alibaba could hold a rousing IPO that generates a huge pop for Yahoo shares down the road … but simply holding out hope for that isn’t much of a long-term plan. And in the meantime, we could see plenty of ugly headlines that hold Yahoo back.
Enterprise tech giant Cisco (CSCO) is pushing new highs, trading near $26 a share. But a look at the charts reveals an unfortunate ceiling for CSCO right around this price that dates back to its 2007 fall from grace.
Specifically, Cisco hasn’t traded above $26 for more than a few trading days since the market’s historic highs in late 2007, and it hasn’t traded above $27 once.
With the stock up almost 60% in the past 12 months, it is safe to say that it might be time for a pullback.
After all, the fundamentals don’t give any reason for spectacular performance. Cisco has a five-year growth rate of about 7.5% annually, with revenue moving up slowly but steadily; recent sales numbers seem to be in line with this, including a 5.4% revenue bump in its last quarterly report and expectations of about 5% on average this time around.
Hardly seems like a reason to go nuts, but apparently the very low expectations of 2012 have been replaced by a bit of a relief rally in 2013.
Don’t expect that optimism to last. Investors are going to demand material growth in Cisco eventually, and an earnings miss could be very damaging to share prices.
Look for some fireworks on Aug. 14 when Cisco earnings come out.
IBM (IBM) reported earnings that actually were pretty solid at first glance, unlike some of the other tech giants that have missed the market lately. But IBM earnings details showed signs of concern for investors.
If you’ll remember the previous earnings miss at IBM in April, it was a falloff in IBM’s hardware business that spooked investors and sparked a double-digit decline in the stock.
And this time around, we saw continued softness in hardware as IBM earnings showed its Systems and Technology segment saw revenue down 12% year over year. Management itself called hardware sales “mixed” on the quarter in the earnings call, signaling that there might be a long-term problem.
And let’s not forget that overall revenue was down again, marking the fifth consecutive quarter of top-line declines for the tech giant. Software sales were decent, yes, but hardware is where the big money is.
Furthermore, on the heels of a big earnings miss and ugly guidance at rival Accenture (ACN), it might be overly optimistic to think consulting revenue is going to pick up the slack at IBM in the second half.
Oracle (ORCL) reported disappointing earnings at the end of June, with flat revenue for the second straight quarter. This time, Larry Ellison & Co. couldn’t blame the sales force like they did after missing earnings in March, and the stock has taken it on the chin ever since.
And according to Capital IQ data, Oracle hasn’t grown its revenue by more than about 3% year-over-year in a single quarter since its Q1 2012 numbers hit the market about two years ago.
Oracle insists it is ramping up sales, giving cloud players a run for their money and moving big into networking on the heels of its $1.7 billion acquisition of Acme Packet. But thus far, the efforts haven’t borne much fruit and competitors are just as hungry for growth.
With the broader headwinds facing the IT sector and the continued disappointment on the top line, investors might not want to be too patient with Oracle’s plans — especially considering a measly 1.5% dividend.
Oracle sure isn’t going bankrupt with an entrenched business and $32 billion in cash, so bottom-fishing is tempting in hopes of a turnaround. But nothing in the numbers indicates that turnaround will happen anytime soon for ORCL.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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