In the aftermath of the market plunge, many tech stocks have seen big markdowns in valuations. No doubt, investors and analysts see this as a nice opportunity. In fact, there has been a surge in upgrades.
Despite all this, there still is much risk in the markets. And this is likely to be magnified with tech stocks.
Actually, that’s just one of my four reasons why you should be cautious on tech stocks for now. And I even have three interesting short candidates.
Let’s take a look:
Reason #1: Economic Uncertainty
It’s far from clear if the global economy is headed for a recession. But there is growing evidence of a slowdown. For example, the U.S. economy has grown at a 1.3% pace for the first half of this year.
Yet even if there is not a recession, there likely will be problems for tech stocks. All in all, corporations have little visibility. In other words, it’s a good bet that the reflex reaction will be to cut back on information technology spending.
Reason #2: The Move to Austerity
While there is skepticism about the budget deal, the fact is the U.S. federal government will see some spending reductions. This also will be the case throughout Europe.
Keep in mind that a big portion of IT spending comes from government expenditures.
Reason #3: Consumer Pain
According to the latest data, consumer confidence in the U.S. hit its lowest point since 1980. And this negativity might continue for a while — or, at least, that basically was the message from the Federal Reserve.
Consumer spending is a big part of technology, as seen with things like cell phones and laptops/PCs.
Reason #4: Disruptive Change
With the success of companies like Facebook, Twitter and Zynga has come a huge amount of investment from venture capitalists. They are helping to create new businesses that can wreak havoc on existing tech operators. Some of the biggest trends include social networking, cloud computing and mobile applications.
Next: 3 Tech Stocks to Short
3 Tech Stocks to Short
OK, this is grim stuff. But there is some good news — that is, it is possible to make money when stocks fall. This is done through a process known as short selling.
Now, it can be risky, so it is a good idea to make sure the positions are a relatively small part of your portfolio (as should be the case with any investment).
So, which stocks are good shorts? Here’s a look at three:
Tech Short #1: LinkedIn
LinkedIn (NYSE:LNKD), which is a social network for professionals, was one of the year’s hottest IPOs. After all, it has been growing at a torrid rate, as seen in its latest quarterly report.
But there are some concerns. Consider that several Wall Street firms — like JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) — have downgraded the stock because of the high valuation.
But the biggest problem could be the expiration of the lock-up period, which comes in November. This will be the first time that insiders, VCs and employees can sell their shares. The result could be lots of pressure on the stock price.
Tech Short #2: SolarWinds
SolarWinds (NYSE:SWI) develops network management software and has a customer base of more than 95,000. While the company has been growing at a nice pace, it faces heavy competition, including biggies such as Hewlett-Packard (NYSE:HPQ), IBM (NYSE:IBM) and CA Technologies (NASDAQ:CA).
There’s another big issue: A “meaningful portion” of SolarWinds’ sales come from the federal government.
Tech Short #3: Garmin
People increasingly are using their smartphones as GPS devices. It’s convenient and often cheaper than the alternatives.
So, yes, there is growing pressure on Garmin (NASDAQ:GRMN). True, the company has been trying to bolster its other businesses in other fields, such as fitness, marine and aviation. But these do not have nearly the scale of the consumer segment.
Garmin reported an 8% drop in revenues for the latest quarter. Basically, it looks like the company is suffering from a technology disruption. And this can be horrible for shareholder value. Just look at Nokia (NYSE:NOK) and Research In Motion (NASDAQ:RIMM).
Tom Taulli is the author of various books, including “All About Commodities” and “All About Short Selling.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.