Twisting in the Wind
MARKET OVERVIEWThe winds of change are a-blowin’ for the tech sector, and with them come an almost daily stream of different outlooks on which companies are best positioned to move forward in this very different economic climate.
Although far less in destructiveness than a full blown hurricane, on Friday the NASDAQ dropped almost 100 points from its opening high to its closing low, signaling a lack of conviction by traders who were not comfortable leaving equity positions open over the weekend. To be clear, this unease is not directly related to Russian aggression in Crimea; the tech sector derives very little revenue from the countries and businesses that will be most impacted by that regional kerfuffle.
Of far greater concern is the overall valuation of many tech stocks that are priced for perfection, just as we head into a less than perfect economic environment. Not the least of which was Janet Yellen’s comments regarding the likelihood of rising inflation later year, although what she said was not surprising so much as the fact she actually said it at all.
To be clear, all of this is good news for savvy investors who recognize the change in direction of these financial winds and are willing to set sail on a new course. What the market is clearly telling us is that you can no longer simply buy “names”, regardless of underlying valuation.
Although 3D Systems (NSDQ: DDD) may currently be the most visible example of that, if you look closely you will see other highflyers that appear to be drifting towards a similar fate. In the past five days alone Amazon.com (NSDQ: AMZN) has lost more than $20 in value, a drop of 5%. Even Facebook (NSDQ: FB), seemingly impervious to investor recrimination regardless of how much money it spends, has lost 7% of its value over the past two weeks.
Meanwhile, much more reasonably priced tech stalwarts such as Cisco (NSDQ: CSCO), Intel (NSDQ: INTC), and Microsoft (NSDQ: MSFT) are making modest, but significant, gains during this recent period of market turbulence. And if you look closely, the explanation for all of these price movements are entirely consistent with what we have been saying all along.
Those companies that are proactively investing in an innogration strategy that enable the core technologies of the second half of the current long macroeconomic wave will ultimately thrive, while those that do not will eventually suffer. It won’t happen overnight, but it will happen incrementally as evidenced by recent events concerning each of the stocks mentioned above.
And that’s the funny thing about the wind; you can’t see it, weigh it, or hold it in your hand, yet it remains one of the most powerful forces on the planet.
NASDAQ Composite Index:
Friday, March 21 = 4,276.79
Year to Date = + 2.5%
Trailing 7 Days = – 2.2%
Trailing 4 Weeks = – 0.4%
I know we have written about 3D Systems (NSDQ: DDD) repeatedly over the past couple of months, but since it is a short sale recommendation in our Equity Trades portfolio it is important that you understand exactly where we stand on this stock since it is now in the midst of the major decline we anticipated.
If you own DDD stock then you still have a gain in it provided you bought it prior to last November. The stock has very strong support at the $50 level, and is unlikely to drop through it barring very bad news specific to the company. If you shorted it or bought puts on it per our recommendation, then you need to think seriously about closing out those positions soon.
In the long run, three-dimensional printing is a major growth industry, so this company isn’t going to dry up and blow away like the dot.com stocks of fifteen years ago. It is overvalued, but does have positive earnings so the stock is likely to stabilize once the “hot money” has been shaken out of it – which should be soon.
We don’t believe in sticking around to the bitter end, so as of today we are closing our short position in 3D Systems. It still may have a bit further to drop, but we will gladly bank our big gain and look for a fatter fish to fry.
Also, a quick word on Symantec (NSDQ: SYMC) which we recommended just last week as a play on the Cloud. We said the company was moving proactively in that direction, and sure enough late last week they fired their current CEO for not moving fast enough.
That news has temporarily spooked the stock, sending its price down into the $18 – 19 range. The worst thing a tech company can do is stand still, and Symantec definitely cannot be accused of that. We believe it correctly recognizes the need to aggressively innograte, and admire the fact that they have committed themselves to making that happen before it’s too late.
It could get a bit wild and wooly for the next several weeks until there is more clarity from the company, but we view this recent price weakness as an opportunity to capitalize off of investor anxiety so we reiterate our buy recommendation on SYMC up to $22.
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Also, we are contemplating adding a third portfolio of recommended stocks that would consist of much smaller companies that we believe possess the potential to become long term winners, but do not fit very well within our stock valuation models (the BiQ and STR) due to their small size and limited history. So, our advice would be based primarily on our subjective opinion regarding their long term growth prospects. Is this something you would like to see? If so, let us know! Thank you.