There is no official definition for a “dead-money stock” — no particular numbers a stock has to meet to fit that definition. But they’re easy to spot in your portfolio.
Often, the company sports a rock-solid balance sheet and produces lots of cash flows. But, for whatever reason, the top line grows at a frustratingly meager rate. The result is that the stock trades in a tight range for an extended period of time.
Believe it or not, tech stocks can often be dead money. A key reason is that a market can get saturated, but a company may still have tremendous lock-in with customers, which stabilizes revenues. This is what happened to companies like Microsoft (MSFT), Intel (INTC) and Cisco (CSCO) after the early 2000s. The valuations languished for more than a decade.
So, what tech stocks may be next to fall to the curse of the dead-money zone? Here’s a look at three likely candidates for the next dead-money tech stocks.
Dead-Money Tech Stocks — Qualcomm (QCOM)
Qualcomm (QCOM) stock may seem like an odd choice. Isn’t the company a huge beneficiary of the mobile revolution? Shouldn’t it among the hot tech stocks instead?
Granted, QCOM has an extremely valuable trove of intellectual property for critical mobile technologies. In fact, it owns the standard for the industry, CDMA (code-division multiple-access). But investors seem to be expecting growth to stall for some time. On news of the latest earnings report, QCOM stock plunged more than 11% — a rare drop for mega cap tech stocks.
But earnings for QCOM were dismal. Consider that revenues increased a meager 3.3% in the fiscal fourth quarter. Not even the successful launch of Apple’s (AAPL) iPhone could provide much of a lift.
But there are some tough challenges facing QCOM. One is that much of the growth in smartphones is coming from emerging markets, where the price-points are lower, which squeezes margins.
But perhaps the most dangerous problem is the legal inquiry from the China National Development and Reform Commission, which is looking into anticompetitive actions. QCOM is already feeling the pain from the investigation. Even if nothing comes of these actions, it will still take a while to get to any resolution.
In other words, the uncertainty will likely be enough to make QCOM stock dead money.
Dead-Money Tech Stocks — Oracle (ORCL)
For 37 years, Oracle (ORCL) CEO Larry Ellison has built an empire to the tune of $180 billion in market cap. Along the way, he has won tough battles against competitors and entered new business categories.
But Ellison has recently stepped down from the top spot and promoted Mark Hurd and Safra Catz as co-CEOs. While these executives are top-notch, they still have a lot to prove.
After all, the company is at a crossroads, which could mean headwinds for ORCL stock. For example, the company dragged its feet when moving towards cloud computing. Because of this, rivals like Salesforce.com (CRM) and Workday (WDAY) have been eaten at Oracle’s market share. In the past, ORCL has been able to evolve by pursing a aggressive M&A strategy. But this time around, companies like WDAY and CRM may not want to sell out. Besides, even if they did, the price tags would be extreme.
But even the core database business is under assault. Oracle must fight startups like Datastax and MongoDB. Even larger companies like Amazon (AMZN), are moving into the lucrative industry, while companies like Google (GOOG) and Facebook (FB) have built their own solutions.
All in all, ORCL stock could languish for some time. And unfortunately, Ellison is no longer at the helm to reinvent the company again.
Dead-Money Tech Stocks — Symantec (SYMC)
For the past decade, the total return on Symantec (SYMC) stock was a dismal -14%. That’s about 100 percentage points worse than the S&P 500. And SYMC looks like it will only continue to lag other tech stocks for the foreseeable future.
SYMC stock has gotten a spark from a recent announcement to split the company, with one division focusing on security and the other on information services. All in all, this should be a better structure. But the split of SYMC stock will take at least a year, which means the stock should continue to languish for a while longer.
The other problem is that SYMC is an old-line company, which has been slow to move into new categories. On the security side, the bulk of the revenues come from the antivirus segment. But this has been eroding because of low-cost and free alternatives. The stagnation in PC sales hasn’t helped, either.
In terms of storage, there are new fast-growing startups that are introducing disruptive approaches. Some of the players include Hortonworks, which recently filed to go public, and Pure Storage.
Even though the split of SYMC makes sense, investors have already factored in the benefits with the recent rally. But going forward, the company will have to deal with the complexities of the transition as well as the challenges of finding ways to combat fierce competitors.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
