Tech sector pundits vacillate between wildly bullish and frantically bearish, and that’s understandable. Tech is an increasingly big sector that has a lot of niche markets.
But these seven F-rated tech stocks — Stratasys (SSYS), 3D Systems (DDD) TiVo (TIVO), Teradata (TDC), Xerox (XRK), Yahoo (YHOO) and Yelp (YELP) — are finding it hard to compete in their niches, and some are simply being overtaken by technology itself.
Most of these stocks are trading much closer to their 52-week lows than highs, and it’s not because they’re undervalued. Most tech stocks that show any sign of promise are doing well right now. If anything, most good tech stocks are overvalued more than undervalued.
But that’s not the case with these seven names. Because tech companies are infused among most other market sectors, you can’t always tease out how well “tech” is doing in and of itself.
However, most sectors are just below the water line, which means stocks that are significantly worse off than their respective sectors are having a tough go of it. And it’s not important whether it’s management or market trends; these aren’t stocks to buy or hold.
F-Rated Tech Stocks: Stratasys (SSYS)
Stratasys (SSYS) is an example of what happens when a new technology explodes on the scene and is immediate embraced by technophiles.
Rapid prototyping, more commonly called 3D printing, burst into investors’ imaginations a few years ago and the sector went from 0 to 100 (seriously — check out SSYS historic price chart) almost overnight.
Investors, both institutional and individual, saw the potential. And these small firms went public to leverage up their newfound acceptance and began sprinting for market share.
The problem is twofold. First, the exponential growth that accompanies this kind of sector gold rush can’t be sustained forever, and eventually the stocks have to fight for more slowly expanding market share. Second, bigger players decided to step in at some point either by acquisition or by building out their own capabilities, further challenging the pioneering upstarts.
Both are hitting SSYS pretty hard right now. The stock is off 77% in the past year, rapidly approaching its 52-week lows. What’s worse, as revenue declines, SSYS is writing off recent acquisitions at more than their acquired price; that’s never good.
F-Rated Tech Stocks: 3D Systems (DDD)
3D Systems (DDD) is in a similar position to SSYS. With all the inflow of money from its early days, DDD was very aggressive in the acquisition market, buying out the competition, taking their clients and looking like a juggernaut.
In the past four years, DDD has made more than 50 acquisitions. The problem is, you have to efficiently integrate all those entities. And that wasn’t happening. This is a quintessential high-growth sector dilemma. If you grow slowly and steadily, investors fear you’re moving too slow and you’ll be left behind. If you move quickly, integrating operations becomes a nightmare and hamstrings real, substantial growth.
Adding to DDD’s troubles, the CEO abruptly quit in late October, days before Q3 earnings were announced. The company is now being managed by an executive management committee.
And it’s going to have tough row to hoe at this point. Both investors and employees are a bit burned out by the downward slide that is increasing in momentum, not decreasing.
Don’t be surprised if a larger firm — like HP (HPQ) — steps in and buys this one for a song, because there’s no reason to pay a premium for a good company that’s poorly managed.
F-Rated Tech Stocks: TiVo (TIVO)
TiVo (TIVO) is an example of a company that’s fighting for relevancy in a new market that it helped pioneer.
It’s also an example of how a small company can bring a technology to market, own it, be a dominant player (becoming a household verb) and then, only a few years later, be fighting for its very survival.
TIVO filled the void between VCR recordings and broadly available DVR recordings. But then, as the cable and satellite markets consolidated, TIVO made the strategic mistake of deciding to continue to stay independent and sell its recording boxes to consumers as it had for years.
But the content providers already had set top boxes in viewers homes and simply began to incorporate DVRs into the boxes for a nominal rental fee. And as memory got cheaper, content became more lucrative and DVRs became more popular, TIVO began losing market share rapidly.
And that is no position at which to negotiate a new partnership deal with a content provider. You need to pivot. And it has taken TIVO a while to find that pivot.
Its new deal with Viacom (VIAB) may help stave off the inevitable but it’s not a turnaround strategy.
F-Rated Tech Stocks: Teradata (TDC)
Teradata (TDC) is another story of a tech pioneer that is now floundering as the space it help build grows up around it.
TDC was one of the first big data companies. When big data started, it was like the cloud: The tech community was talking about it, but most mainstream businesses and consumer didn’t really get it.
Few organizations even had the ability to crunch the immense amounts of numbers, create relational databases and squeeze out compelling granular information that could be used to sell more product, build better cars or make more reliable trading platforms.
But TDC was there, winning bigger and bigger contracts and compiling a client list that was a who’s who of the global corporate heavy hitters. Major insurers, retailers, financial institutions and manufacturers are clients.
Now TDC is swimming with sharks. Big sharks. And it’s having to lower guidance for the year, sell off divisions and figure out how not to start bleeding before it can find its way again. The stock is off 40% this year.
F-Rated Tech Stocks: Xerox (XRX)
Xerox (XRX) was the TiVo of the 1970s. It too became a verb that meant to copy something. At the time, it was high praise because it spoke to the unique qualities that XRX bestowed upon the world of copiers and other business machines.
Now Xerox has broadened its mandate to include business productivity solutions and software, as well as office equipment.
And XRX is a survivor. Remember that Steve Jobs actually got the ideas for email and graphical user interfaces (GUIs) from XRX’s Palo Alto Research Center (PARC). It was one of the most cutting edge R&D facilities in tech world at the time.
Unfortunately, most of its innovative ideas ended up leaking out or shut up inside. XRX had the classic problem of forward-thinking researchers inside a traditional corporate manufacturing structure. Great ideas were disruptive and bothersome…and risky.
And to this day you could argue the XRX has yet to get out of its own way. Its one-year return is -23%. Its 5-year return is -4%. Its 10-year return is -16%. And its 2.7% dividend hardly adds any attraction.
F-Rated Tech Stocks: Yahoo (YHOO)
It’s hard to remember when Yahoo (YHOO) was one of the driving forces of the Internet. Looking at its stock chart, you would have to say its glory days were in the first dotcom boom.
YHOO continues to fancy itself a growth stock, yet it hasn’t really done anything significant to grow in many years.
Right now, its most important asset is its large position in Chinese online juggernaut Alibaba (BABA). YHOO stock actually moves more on BABA news than its own news.
In 2012, Yahoo hired a former Alphabet (GOOGL) exec, Marissa Mayer as CEO. She was 39 at the time. It seemed like YHOO was harking back to it youthful days, like seeing that person at your 25th high school reunion who still acts like his/her high school days were the best time in their life.
And now, after years of uninspiring rearranging of the silverware on the table, Mayer has admitted that something needs to be done. So YHOO recently announced that it has hired consulting giant McKinsey to come in and figure out what should be sold, what should be shut down, and what should be expanded.
For a company that has been around this long and for a CEO who is supposedly one of the best and brightest in Silicon Valley, having to hire outsiders to sort out your organization is not inspiring. And it add ammunition to critics who have said that YHOO has been in denial for many years.
We’ll see if admitting the problem helps with recovery.
F-Rated Tech Stocks: Yelp (YELP)
Yelp (YELP) has one of the more optimistic stories of the collection. It’s lousy grade comes from its lousy previous quarters this year.
But its recent Q3 earnings were solid, which bodes well for its new efforts. One effort that bears are watching is its recent acquisition of Eat24, a food delivery service. YELP hopes to build out a delivery service from its site for participating restaurants in its local directories.
Earlier this year, YELP hired a firm to shop the company, but then it pulled the plug. At current prices, however — especially after a strong quarter — something may show up in the next quarter or two.
But for now, the stock is off 51% year-to-date, and one quarter doesn’t make a trend. There are better places to put risk capital, and there are more deserving turnaround stories out there.
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.