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If the move in equities and, in particular, large-cap tech (think Microsoft (MSFT), Cisco (CSCO) and Intel (INTC)) over the past two months are precursors for what lies ahead in the second half of 2010, we feel that most investors are going to be highly disappointed with where equities go from here. Still in denial about the re-emergence of the secular bear, perhaps continued moves lower in the aforementioned blue chip tech stocks will wake investors up to 2010’s market reality: valuations are being compressed.

Worse yet, valuations will become even more compressed as the year wears on. While various market pundits continue to rightfully point to a number of very disconcerting macro factors to explain the recent move back into bear market territory for equities, why not simplify matters for investors by stating that this is what happens at the tail end of secular bear markets: stocks get cheap, then cheaper, and then dirt cheap before a generational bottom can be hit.

While it is true that we are somewhat simplifying matters here, we tend to feel that such an explanation would help the “Average Joe” investor understand why the likes of Microsoft, Intel and Cisco (to name just a few of the most obvious stocks that have seen valuations quickly compressed) are trading where they are.

With the trend clearly lower and another 15-20% of possible downside from current levels for all of the major indexes, investors should expect to see valuations on stocks of all stripes move lower into year end. Again, repeat after me: stocks will get cheap, then cheaper, and then dirt cheap before a generational bottom can be hit.

As growth slows for the worldwide economy in the second half of the year, companies who fail to meet expectations will see their stock prices move lower, sometimes in an exaggerated fashion. In some cases, earnings will look fine yet investors will still drive these stocks lower as numbers get scrutinized unmercifully.

Take RIM (RIMM) as an example, perhaps the clearest example of a stock that has gotten cheap but yet is still nowhere near a bottom. Trading for 9X recently revised fiscal 2011 numbers, RIMM’s valuation will still head lower as the market continues to discount, among many other things, the eventual margin erosion for the company as they attempt to hold market share ahead of Verizon’s (VZ) release of the iPhone early next year. Repeat after me, RIMM is cheap, but will get cheaper, and then dirt cheap before all is said and done.

In the hopes of catching the next RIMM before a big move lower, over the past month we have assembled a list of companies that we feel could have significant downside should earnings get missed in the second half of the year. While some of these names could buck the bear, odds suggest that many of these stocks will see their valuations compressed with any misstep. In some cases, the companies will do nothing wrong: their stocks will just move lower because that is what happens at the tail end of secular bear markets: stocks get cheap...

Athena Health (ATHN): For all intents and purposes, Athena is a broken stock. Extended to the downside, we are waiting for more of a short-covering rally in the name before entering any position. Still trading for 50X 2010’s earnings estimates, we feel that a move to the mid-teens is a distinct possibility should the company disappoint investors this upcoming quarter.

Blackboard (BLKB): Will non-profits have less use for Blackboard’s software should non-profit funding drop significantly in a double-dip scenario? Trading for over 20X earnings already and with analysts anticipating a flat year of growth, how long will the market give BLKB a premium valuation?

Blue Nile (NILE): NILE continues to defy gravity. Trading for 45X 2010 numbers and expected to only grow 20% in 2010, it seems just a question of when NILE sees both its stock and P/E cut considerably.

Buffalo Wild Wings (BWLD): Having already disappointed investors over the past two quarters, BWLD seems very susceptible to either a slight miss or weaker-than-expected guidance in an economy which is slowing down. Watch for a break of $36, as this would usher in a move to the low $30s.

CREE Inc. (CREE): One of the biggest winners over the past year, CREE is trading for 6X sales. This high valuation will not hold up during an extended bear-trend.

Molex (MOLX): Could electronic component maker, Molex, see substantial earnings estimate revisions to the downside in the coming months? Ticonderoga seems to think so: after meeting with local contacts in Taipei, overall demand trends in the tech supply chain have been lackluster and they have growing concerns regarding the performance at Molex over the next couple of quarters.

Monolithic Power (MPWR): One of the weakest semiconductors out there. Can estimate cuts be far behind? Trading for 15X estimated numbers, it is conceivable that MPWR sees lower numbers and a lower multiple before the year is up.

Panera Bread (PNRA): Growth is slowing for this favored restaurant stock. Trading for over 20X 2010 numbers, we feel that PNRA is headed to the low $60s on any earnings miss in the 2nd half of this year.

Northern Trust (NTRS): After missing estimates last quarter, Northern Trust still trades for 16X 2010 numbers. NTRS’s chart looks very similar to RIMM’s before its big gap down on Friday.

Rosetta Stone (RST): Although impressed with their product line, the company’s recent CFO departure casts doubt on the company’s ability to deliver in the 2nd half of this year. Analysts are looking for $.90 in earnings this year. Should the company miss expectations, we think there is downside to the mid to high teens.

Disclosure: Author short via puts on BWLD, CREE, MOLX, NILE and NTRS

Source: 2010: A Time When Stocks Got Cheap, Then Cheaper, Then Dirt Cheap