2013: Year of the Tech Dogs

 | Apr 02, 2013 | 1:05 PM EDT  | Comments
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Stock quotes in this article:

aol

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yhoo

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bbry

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GRPN

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znga

In 2012, the standout performer among tech stocks was AOL (AOL). From its bottom at around $10 in August 2011, the stock quadrupled to $40 briefly in 2012. It came back a bit, but it is now slowly inching up again.

The most remarkable thing about AOL's ascent over that time was how no one really paid attention to it until, the day it hit $40, a couple of people tweeted, "Oh, hey, look ... AOL's at $40 ... anyway, back to talking about Apple (AAPL)..."

I recall talking about AOL as an investment prospect in the middle of 2012, and one portfolio manager telling me, "Come on ... who uses AOL anymore?"

AOL's rise was the revenge of the dog. However, it may be the harbinger of things to come. 2013 could be the whole year of the tech dogs.

As in a good zombie movie, many tech dogs were given up for dead last year.

Yahoo! has (YHOO) been the first tech stock to follow in AOL's footsteps starting in October. It's now up more than 50% since then on renewed hope of a core business turnaround and a possible 2013 IPO for Alibaba. Over the past year, I have banged the table here and elsewhere that Yahoo! would be the sequel to AOL's move, and it has happened.

Yahoo's stock basically got stupid cheap on a sum-of-the-parts basis, and I could see several different catalysts to finally wake people up to that fact: return of cash to Yahoo! shareholders from the Alibaba stake sale last year, a pledge by the CEO not to waste the money, stock buybacks, an increase in value of Yahoo! Japan and Alibaba, and the possible Alibaba IPO this year. There are still more catalysts ahead, including evidence of a core business turnaround and a renewed search deal with Microsoft (MSFT) or a new one with Google (GOOG).

BlackBerry (BBRY) is a stock I've owned since November. It also got stupid cheap. The catalysts were the launch of the new phones to drive the first leg of the stock's rise. We're now in a place where a majority of the sell side says that BlackBerry is still doomed, and 33% of the float is short. I believe it can still be a strong and profitable No. 3 or No. 4 player, and this will materialize in the results over the next six months, helped by the launch of the Q10. I'm staying long.

I believe there are other great "dog" opportunities this year. I've recently gone long both Zynga (ZNGA) and Groupon (GRPN). Here's why.

Zynga had one good report in January, and many people believe that it's a play on online gambling. It is, of course, but I'm more interested in the platform the company is trying to build in the mobile world in order to get people to want to buy new Zynga games more than any other mobile game. A lot of investors will take a "show me" attitude and wait. I see a company that already did this with its Facebook (FB) alliance for the web when no one thought it could, and it worked out fabulously.

I am willing to give Zynga the benefit of the doubt here at a lower price, rather than waiting for it to double from here. I also believe that management has been humbled by the past year's hammering of their stock, and that has made it a better company.

With Groupon, Eric Lefkofsky is a co-founder who is strongly in charge. Once the company stanches its European losses, it will be solidly in the black. The Groupon Goods story will keep playing out this year, and the company will likely show some additional profitability in mobile as the year plays out.

I see both Zynga and Groupon doubling from here this year.

Stick with the dogs in 2013. They should do better than the highflying momentum stocks that could get crushed on a bad quarter. Under-promise and over-deliver.

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