Tech Stocks Dancing Around the Maypole

 | May 10, 2013 | 1:00 PM EDT
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So far, May has been a pleasant month, with stocks up almost 2% in the first nine days.

But the people who are really dancing around the maypole are owners of Electronics Arts (EA), Cliffs Natural Resources (CLF) and Micron Technology (MU). Those stocks are up 23%, 18% and 15%, respectively, in the five trading days through Thursday, making them some of the hottest issues in a strong market this month. Only one of those three stocks looks like a buy to me.

Electronic Arts, a video game maker with headquarters in Redwood City, Calif., created euphoria by increasing its guidance for fiscal 2014, which ends next March. The stock, which had been rising gradually the first four days of May, shot up 17% on Wednesday, its best gain in 13 years.

I can't join in the euphoria, although I have liked Electronic Arts in the past, at lower prices. Now, it goes for 48 times earnings and 3.3 times book value. That's rich for a video game maker, especially one that posted losses four years in a row in fiscal 2008 through 2011.  

Cliffs, up 18% in the past five days, is a better situation.  A major producer of iron ore and a minor producer of coal, Cliffs is subject to rapidly alternating fits of investor euphoria and despair.

Because much  of its production is exported to China, Cliffs shares zoom up when people think China will increase iron ore imports, and plummet when people think it won't. The shares are also sensitive to the perceived state of the economy.

Back in mid-2008, Cliffs sold for over $100 a share, hitting a high of $109.62. Today, the stock languishes below $23. That is only 0.7x book value (corporate net worth per share).

Cliffs doesn't look cheap based on earnings because the earnings for the past four quarters amounted to one thin dime. But Cliffs earned as much as $11.48 a share in 2011, and lost as much as $6.32 a share the year after. Averaging the past five years of wildly volatile earnings, you get normalized earnings of $3.81 a year. The stock currently sells for less than 6x those normalized earnings.

Micron Technology, a chip maker based in Boise, Idaho, can be a good investment at times. But Micron has a couple of aspects that trouble me. It has posted losses in four of the past six fiscal years. Analysts expect another (albeit smaller) loss this fiscal year, which ends in August.

The other thing that troubles me about Micron is that Fidelity Management & Research, which owned more than 33 million shares of Micron at the end of March, had recently unloaded 11 million shares. Alliance Bernstein, another big holder, also looks like it may be whittling its stake. I fear there may be more shoes to drop from those two big sellers.

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