The tech sector has been on a tear for quite a while, so it’s no surprise that the correction has ended that run for many tech stocks.
Some will return to greatness and wildly exuberant valuations, and others will now be coldly assessed for their market strength, staying power and brand strength in coming turbulent quarters.
Whether it’s macro forces or sector dynamics, these tech stocks are losing their grip, and their stocks are starting to reflect the fact that investors are starting to give up on these boats during the flowing tech tide.
While stocks were all rising, these five went along for the ride. But now that we’re seeing significant volatility, continued weakness in China, impending rate hikes and turmoil in emerging markets, it’s time to lose the riskiest stocks.
It’s much more prudent to stick with stocks that are showing real signs of growth than hope that growth will come or that a buyout is in the wings. This is no time to coddle the weak.
Tech Stocks to Sell: Itron (ITRI)
Itron (ITRI) is one of the pioneers in smart metering technology for the electric, gas and water industries.
This technology is meant to allow real-time analysis of usage, distribution patterns and consumption rates. That analysis benefits the homeowner, office HVAC team as well as utility analysts.
By allowing everyone access to more information about their energy and water consumption, everyone in the supply chain can make more informed decisions about how and when energy is put to its best uses.
The only problem ITRI is having is challenges from major players like General Electric (GE), Honeywell (HON) and Johnson Controls (JCI) in the commercial markets and Google’s (GOOG) smart thermostat Nest (as well as other upstarts) in the consumer market.
And even though earnings continue to rise, the momentum of growth is slowing. What’s more, its earnings misses are getting wider and wider. And its guidance is becoming less optimistic. Time to power down on ITRI stock.
Tech Stocks to Sell: Cree (CREE)
Cree (CREE) is all about LED lighting. And it was quite a hot stock a couple of years ago.
But the company and the stock have run into a couple of significant challenges. First, replacing a relatively cheap technology (incandescent lighting) with a relatively expensive technology (LED lighting) means you can grab a certain amount of market share quickly, but a majority of the market is going to be more price inelastic and slowly convert. The result is a big initial move in sales, which slow down after the early adopters are exploited.
Second, when you’re substituting a quick turnover technology like standard lighting with a durable technology like LED lighting, long-term sales growth is going to suffer unless you can continually expand your market. And when money is tight — for consumers, industry and government — that’s a difficult row to hoe.
But that’s precisely what’s we’re seeing with CREE. Worse, it has a lot of lower-priced competition that has come in to challenge for market share in some of its markets.
It’s best to let the LED sector shake out a bit more before committing to any one stock.
Tech Stocks to Sell: Yelp (YELP)
Yelp (YELP) is also another industry leader that is now struggling with low barriers to entry and a super-saturated market for what was once its unique selling point. But with YELP stock down 55% so far this year, investors should stay far away from this former pioneer.
Yelp was one of the first consumer-driven food and product review sites. It was unique in the fact that it gave average people a place to discuss their opinions about a restaurant or a dining experience. But this was back in the days when niche businesses were blossoming like wild flowers in the spring.
Now, major social media players are elbowing in on these niches; startups are challenging on local levels around the globe; and niche players like Yelp are having to expand their markets to keep the growth train running and investors happy.
The problem is, as all these sites start doing the same things, the unique value that the sites started with are now diluted and it’s harder for one brand to hold its audience over time.
When there were only three major television broadcasters people chose and stuck to a brand. When cable opened up the broadcasting universe, it was much more difficult for any one channel to gain a consistently dominant market share.
YELP stock dropped 38% in July — well before the correction and despite revenue. That’s not a good sign for the future.
Tech Stocks to Sell: 3D Systems Corporation (DDD)
3D Systems (DDD) is much like CREE. It’s an innovator in dynamic and exciting new market — 3D printing.
There is no doubt that 3D printing has a long life ahead of it, but the challenge with DDD is two-fold.
First, because 3D Systems was a pioneer and there were only a handful of publicly traded companies building these machines, the stock was trading at an absurd premium for a couple years.
But now competition has entered the space. And the big players are able to cut big deals where DDD can’t compete. It has grown wisely, but for its next iteration it has to find a unique niche and not simply compete for market share with major global competitors.
These challenges have caused the stock to lose 74% of its value in the past year. And that loss came through a steady decline, not a rapid correction-induced selloff.
Again, this is a nascent industry and as the big players move in, these pioneers will be driven out or bought out. But this isn’t the time to bet on a big premium buyout for DDD. GE or HON could pick it up for pennies on the dollar at this point.
Tech Stocks to Sell: Yandex (YNDX)
Yandex (YNDX) is the most obvious avoid on our list of bad tech stocks.
Why? Because it provides Internet search services in Russia, Turkey, Ukraine, Belarus and Kazakhstan. And its mission is to provide neutral reporting and information to its audiences. These are some of the most autocratic countries on Earth.
That business model is challenging enough good times.
But when these countries are undergoing serious strife, it’s a nearly impossible challenge. And that’s the situation YNDX stock faces now. Turkey is dealing with restive Kurds, a collapsing currency and ISIS; Russia and Ukraine are engaged in an active military campaign against one another; and the other two countries are struggling to remain economically relevant with authoritarian governments that Moscow controls.
YNDX does hold a lead over ride-hailing juggernaut Uber with its taxis in Moscow, and that may be worth something at some point.
But this is a company that recently suspended long-term guidance because of the “limited visibility in the macroeconomic environment.” While its numbers look good for now, this is no time to be jumping in.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.