Get me some tech! I need new names here! That used to be the war cry I had at my old shop every September because I wanted to play the annual seasonal trade in this huge part of the S&P 500.
What hasn't moved yet? What has lagged, and what is about to play catch-up? Give me some merchandise!
Suffice it to say that those screams for new ideas aren't working any more. Tech is more treacherous than I have ever seen it and not because of potential shortfalls. It is treacherous because it feels like tech as we know it is going away.
This morning's downgrade of the semiconductor equipment sector is just one more nail in the coffin of the traditional places to run to if you want to own some tech to participate in the annual love fest. Nobody wants to own stocks of companies that pump out expensive machines that make chips for customers who are frantically trying to cut their equipment budgets.
Think about it. For years we have been buoyed by the endless demand for cellphones and personal computers. We could always count on billions and billions sold to replace older less powerful machines and to meet demand from the lesser developed countries.
Demand is still out there and billions and billions of devices are actually still being sold. But the trajectory has gone from fast growth to slow growth to no growth and now, in many cases, to year-over-year declines.
Plus, the iterations -- desktops, laptops, notebooks, net books and ultrabooks -- just aren't selling all that well -- certainly not well enough to risk a seasonal bounce.
For years we could always count on some new product cycle. For example, Intel (INTC) would come out with a more powerful chip or Microsoft (MFST) would release an important upgrade. Sure enough, we are getting one from Microsoft -- but have you ever seen less enthusiasm for a new cycle, especially when those of us who have tried it find it very exciting? I smell a secular decline, not a cyclical one and it is being hastened by the $700-billion behemoth that is Apple (AAPL).
The amazing thing is that we know that Apple is a small part of this personal computer market. But it's almost as if the better mousetraps abound and the marginal purchase of a laptop or desktop is going to Apple and the tablet market, which is on fire, seems like a replacement for the entire industry. Now that Apple is about to ship the new and powerful iPhone 5, I am sure that many will simply stop carrying personal computer (PCs) and go for a two-device world. And neither device is made by Dell (DELL) or Hewlett-Packard (HPQ) -- and neither has Intel or Microsoft in them. Dell's got a 3% yield. Any takers? Not with a lineup that sells machines into Europe and government and has tried to build out enterprise hardware and software and yet keeps disappointing. Hewlett-Packard? I don't know what to say. It can't seem to reinvent itself, it doesn't have a tablet, and its machines are almost all commodity. It has huge sales but not a lot of value.
Now it's not as though there is no tech worth owning at all. It's just that there's nothing new to buy in any of the iterations out there that has the potential to generate anything close to an upside surprise.
Think about it. Intel is as cheap as I have ever seen it and the company has some solid product lines leveraged to the Internet and storage. But it has preannounced to the downside and is supported only by the bountiful 3.86% yield. You want to own Advanced Micro Devices (AMD)? Good luck. Micron (MU)? No thanks. They are just value traps with balance sheets that look tattered compared to Intel, although so does almost every other company's balance sheet.
Texas Instruments (TXN)? I just told you it is struggling to make the numbers. That's not something that will turn on a dime. Nvidia (NVDA) is a battleground but the latest data points are negative. You can own Xilinx (XLNX) and Altera (ALTR) but then again, they sell into communications and that market can be very spotty, despite the need for chips that allow for more speed and better graphics for cellphones.
That leaves Broadcom (BRCM), Cirrus Logic (CRUS) and Qualcomm (QCOM), all of which are linked to smartphones. Shares of Cirrus, the sound chip company, have rallied and rallied and rallied some more. The darned thing is up 170%, so it is hardly undiscovered. I actually think that both Qualcomm, up 17%, and Broadcom, up 25%, for the year can be bought. But the charitable trust already owns Broadcom and you can't own both.
If the semiconductor companies away from those that provide to Apple aren't seeing rising demand, it stands to reason that those stocks can be avoided. Admittedly, I do find Lam Research's (LRCX) special situation intriguing because it just made the Novellus acquisition and that is going to provide synergistic upside. The analysts don't care, though, and it got downgraded today, at $33, from someone who loved the stock in the $40s.
You want to own disk drive stocks when Apple doesn't rely on disk drives for its fastest growing product lines. All you are doing is playing cash flow and momentary supply-demand imbalances and talk about trades that have already occurred; Seagate (STX) is up 80% this year. You can buy Western Digital (WDC), but remember, it just preannounced to the downside.
So, if it is in the PC, people don't want it.
Now this still leaves a couple off fertile investable areas. I like EMC EMC because it's linked to big data, which is still a growth area. Its subsidiary, VMWare VMW is growing, too. The cloud's still got bounce because of the endless demand generated by companies such as Google (GOOG), Apple, Amazon (AMZN) and Netflix (NFLX).
But, with the exception of EMC, those stocks, including Salesforce.com (CRM), Equinix (EQIX), and F5 Networks (FFIV) aren't cheap by any means.
However, the pipes to big data, led by Cisco (CSCO), seem to have stalled and there are rampant stories of Cisco discounting to wipe out its competitors, such as Juniper (JNPR), once and for all. Meanwhile the big telecommunication companies, including Verizon (VZ) and AT&T (T), just aren't spending that much. When they do, they tend to spend it on cellphone towers. Gone are those gigantic budgets that are needed to build out next generation systems. The 4G infrastructure spending is almost complete.
Oracle (ORCL) reports this week, and I am not that concerned about it because it's not expensive. But I don't see big money being made there. I would rather own pseudo tech names such as IBM (IBM), SAP (SAP) and Accenture (ACN), which are three terrific consulting companies.
In addition, the Internet itself does present some opportunities. Google's not expensive and it has plenty of runway ahead of it, particularly because of the failure of others in the space, including Yahoo! YHOO, to keep up. The social media companies that came public all seem overvalued with market leader LinkedIn (LNKD) selling at 200x earnings after rallying 95%. Let's just say you aren't early. I have no desire to catch the bottom in Groupon (GRPN) or Zynga (ZNGA).
Oddly enough, that leaves Facebook (FB), of all things, as an interesting idea. The new ad forms, I am told, are actually doing quite well for advertisers. If that's the case, then the bit supply coming out of lock-up will be met with good demand. I think it's actually worth owning, given that it is still down huge and it is now addressing its mobile weakness with alacrity.
Still, you put it all together, and you are stuck with a group that doesn't have enough players to buy that aren't already exploited.
That's why it's so difficult. That's why people keep piling into Apple and its derivatives. They are, alas, the only games in town.
