Watching the Tech Sector Revaluation in 3D


Earnings season is still in full swing, with each day bringing a new set of winners and losers.  Last week was of particular interest to us, as one of our Equity Trades Portfolio short sell recommendations took a huge hit while one of our Investments Portfolio buy recommendations enjoyed a nice bounce.

One week after (NasdaqGS: AMZN) took a 10% hit after announcing its latest financial results, our other featured short sale recommendation from last month also got slammed: on Wednesday morning 3D Systems (NYSE: DDD) opened almost 20% lower after announcing disappointing quarterly earnings after Tuesday’s close.  Since then the stock has recouped about half that loss, but is still down over 10% for the week, and off 31% from its high of $96 reached just five weeks ago when we first recommended selling it.

Meanwhile, one of our featured buy recommendations continues to recover nicely after also getting stung a couple of weeks ago.  Two weeks ago shares of Apple (NasdaqGS: AAPL) also dropped 10% after its quarterly earnings report revealed weaker than expected sales of its iPhone 5c model, but since then have recouped half that decline based on a stepped-up share repurchase program along with attention turning to an as yet unspecified new product launch later this year.

In our opinion these three events, all taking place with a few days of each other, illustrate exactly what is happening in the tech sector with respect to future valuations.  At one point during the earnings report conference call with Apple CEO Tim Cook an analyst asked if Apple was still a growth stock any more.  Perhaps the more relevant question is, are any large tech companies still pure growth stocks anymore, and if not, then what are they?

In our opinion large-cap tech companies have now become hybrid stocks, possessing traits very similar to those of the traditional utility stocks of the past 45 years (and that’s a good thing, as during the period 1968 – 2013 utility stocks generated NINE TIMES the return of the overall stock market when dividends are factored in).  While growth always will be an important component of a tech stock’s total return, income will increasingly become an equally critical factor.

What we are witnessing now in the market is the transition from a purely growth-oriented valuation model for tech stocks towards one that places equal emphasis on both growth and income. However, until this transition is complete we will continue to see grossly overvalued “growth” stocks go through a painful revaluation process (such as and 3D Systems), while others that have already been revalued produce steady dividends and more consistent growth going forward (such as Apple).

We believe the remainder of 2014 will be an extension of this revaluation process, as each successive quarterly earnings report will shed further light on the extent to which tech stocks are transitioning from pure growth plays into solid total return investments.

NASDAQ Composite Index:

Friday, February 7 = 4,125.86

Trailing 7 Days = -0.5%

Trailing 30 Days = -1.7%

Year-to-date= -0.4% 


In addition to the two Equity Trades Portfolio short sell recommendations discussed above, our other two short sell recommendations thus far remain above their sell limit prices and therefore are still in play. 

However, one of them – Netflix (NasdaqGS: NFLX) – is now above our stop loss limit so any short sell positions in it should be closed out at this time.  While we still believe that Netflix is grossly overvalued, it appears to have shaken off concerns regarding the viability of its long term revenue model. We suspect it will eventually suffer a major decline later this year, but not until the next round of earnings reports come out in April at the earliest.

Our other short sell recommendation – Facebook (NasdaqGS: FB) – is flirting with its stop loss limit price of $66 so we will keep a close eye on it.  We suspect that the story on Social Media and its attendant advertising revenue model will play out gradually in 2014 along with the rest of the overall economy.  There will also be consolidation in this space, with some of the bigger companies sorely tempted to overpay for an acquisition that cannot justify its price.  Stay tuned.

In other developments:

One of our Equity Trades Portfolio buy recommendations – EMC Corp (NYSE: EMC) – is now above its buy limit price of $24 so at this point it is a hold until further notice.

Another buy recommendation – Riverbed Technology (NasdaqGS: RVBD) – has breached its buy limit price of $18 so it is also a hold.

That means Ricoh Company (OTC: RICOY) is the only current buy recommendation in our Equity Trades Portfolio that is currently below its buy limit price of $60, but it is getting close so we suggest you add it to your portfolio soon if you want to get in on what we believe will turn out to be one of the real surprise stocks of 2014.

The good news is that all of the stocks in our Investments Portfolio are still below their respective buy limit prices, so we recommend you look there (below) for new additions to your portfolio. 


Name (Exchange: Symbol)


Stop Loss

Price ($)

Yield (%)



Apple (NSDQ: AAPL)
We view Carl Icahn’s presence as a good thing for AAPL shareholders, as the increased share buyback program should provide a sturdy floor beneath the stock price.

Buy <$595

SL @$495





CA Technologies (NSDQ: CA)
CA is up 50% in the past year but still trades at only 13 times TTM earnings while paying a 3% dividend.

Buy <$36

SL @$25





Cisco Systems (NSDQ: CSCO)
CSCO’s recent pullback provides an excellent entry point to capture a 3% yield.

Buy <$24

SL @$17





Intel Corp (NSDQ: INTC)
INTC continues to pay a strong dividend while steadily rising in value.

Buy <$26

SL @$19





Microsoft (Nasdaq: MSFT)
The change in CEO should ignite a flurry of innogration in this cash-rich behemoth.

Buy <$42

SL @$28





Oracle Corp. (NSDQ: ORCL)
ORCL has been stuck in a narrow range for two years and is due for a breakout to the upside.

Buy <$39

SL @$28





Qualcomm (NSDQ: QCOM)
QCOM’s recent breakout above $70 eliminates technical barrier to continuing appreciation.

Buy <$85

SL @$62





Seagate Technology (NSDQ: STX)
STX and WDC should both benefit greatly from the exponential increase in demand for cloud storage.

Buy <$53

SL @$38





Western Digital (NSDQ: WDC)
STX and WDC should both benefit greatly from the exponential increase in demand for cloud storage.

Buy <$86

SL @$58






Equity Trades

Name (Exchange: Symbol)


Stop Loss

Price ($)

Yield (%)



3D Systems Corp. (NYSE: DDD)
DDD’s recent price spike is premature and drives it PER well above 100 TTM earnings so any hiccup in revenue should send its stock price reeling.

Short >$80

SL @$98




1.3 (Nasdaq: AMZN)
AMZN trades at over 1,000 times TTM earnings and pays no dividend, so it is ripe for a sell off at the first hint of bad news.

Short >$390

SL @$455





EMC’s STR falls just outside our buy zone, but it could bounce 20% very quickly so call options may be the way to play this one.

Buy <$24

SL @$22





Facebook (Nasdaq: FB)
FB can’t buy its way out of trouble unless it comes up with a better revenue model.

Short >$55

SL @$66





Netflix (NSDQ: NFLX)
NFLX is trading at over 300 times TTM earnings while searching for a new revenue model.

Short >$360

SL @$425





Ricoh Company (OTC: RICOY)
A 5% dividend yield is hard to ingore; be patient, but sometime in 2014 it should break out to the upside.

Buy <$60

SL @$50





Riverbed Technology (NSDQ: RVBD)
RVBD’s STR does not yet earn it a buy rating, but recent price activity suggests that next earnings report will surprise the market.

Buy <$18

SL @$14





  • Portfolio updated: Wednesday, January 29th, 2014 3:33PM


BiQ = Boeckl Innograton Quotient.  It is a scale from 0 – 10 that reflects the extent to which a company possesses the critical elements of innogration, and includes a score for dividend yield (0 – 3), change in operating cash flow (0 – 3), and innogration strategy (0 – 4).

STR = Smart Tech Rating.  It is the BiQ adjusted by the ratio of a company’s forward twelve months earnings per share multiple (FTM) to the same ratio for its peer group.  For example, a company with a Biq of 5.0 is trading at a FTM of 30 versus an FTM of 15 for its peer group, so its BiQ score would be reduced by 50% (15/30) for an STR of 2.5.

Stop Loss is the price at which a stop loss order should be set to protect you from excess loss in the event a stock does not behave as we anticipate.  For a long or buy position a stop loss order would be set below the current price, and for a short or sell positon a stop loss would be set above the current price.

Stock Talk

Grumpy Mike

Michael Sessions

Just wondering why you don’r like MU…hellofachart.

Jim Pearce

Jim Pearce

Actually, we do like Micron and are watching it closely. Yes, it does have a very nice chart, but we’re wondering if quadrupling in value over the past sixteen months has taken away most of the short term upside potential and leaves it vulnerable to profit taking if there is any unexpected bad news. Also, its STR is only 4.1 meaning its adjusted value puts its only at the midway point of the 50 stocks we rate, so there are others we think offer more near term growth opportunity.

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