The Technology SPDR (XLK) was down 1.4% during the June 2011 quarter, while the S&P 500 was down half a percent. Industries represented in the technolgy sector include: Internet software and service companies, IT consulting services, semiconductor equipment and products, computers and peripherals, diversified telecommunications services and wireless telecommunications services. Alternative energy companies were not included, as these will be analyzed separately in another article.
Of the approximately 950 stocks in the technology sector, 88 stocks that were trading above $1 at closing on June 30th went down more than 25% during the quarter (see Table). These stocks were analyzed to determine if they would drop more in price, or if they would reverse their losses going forward. The following are the best ideas based on that analysis.
Buy Research in Motion Ltd. (RIMM). RIMM, a Canadian manufacturer of BlackBerry handheld devices for the mobile communications market, has admittedly been a gigantic train-wreck of late. After a nearly perfect 100-fold run-up from a split-adjust $1.46 in 2003 to $148 in 2008, the stock has been in a downward spiral since mid-2008. It has corrected 80% from its highs, losing almost $14.5 billion from its market-cap in the June 2011 quarter. In its core mobile handset market, it has been losing significant market share. Furthermore, it has a dual-CEO management structure that seems ill-equipped to make the kind of changes that RIMM will have to in order to remain a force in the mobile handset market.
However, all that having been said, it still has 24.7% of the U.S. smart-phone market, just a sliver behind Apple’s (AAPL) iOS with 26.6%; Google’s (GOOG) Android leads the market with 38.1% market share. RIM has over $3 billion or $6 per share in net cash available, some of which it will use to buy back 5% of its shares. It is still generating cash every quarter at over $700 million per quarter, and is projected to generate another $5 billion or $10 per share in cash over the next two years. Furthermore, the Blackberry handsets are strong in the emerging markets, where it has made significant inroads by selling cheaper handsets in the prepaid market. And while revenues and earnings may have flattened out in the $20-22 billion and $5-$6 range, it is important to bear in mind that revenues and earnings were in the $1-2 billion range and less than $1 the last time RIMM traded in the mid-$20s.
RIMM is no longer a growth story, at least unless management figures out a way to narrow the technology gap with Android and iOS. That would explain the steep drop in its price, as momentum and growth investors exit this once-heralded story stock. However, it may be a perfectly fine stock for a value investor to start accumulating shares. At its current $28 price, and with almost $6 per share in net cash, it trades at less than 5 price-to-earnings (P/E). Also, management just declared a stock buy-back plan to re-purchase up to 5% of the common shares, which may provide support to the stock. Furthermore, technically, the current $25 bottom corresponds to the break-out of the two-year base the company formed in 2004-2006 before breakout out and rising six-fold in the next two years. Furthermore, a number of positive catalysts can provide upside to the company, including (1) a possible management shake-up that abandons the dual-CEO structure and puts Mike Lazaridis in charge, (2) the incorporation of QNX into BlackBerry handsets later this year narrows the technology gap, and slows down or even reverses recent market share losses, (3) an acquirer may buy the stock at a premium to the current trading price.
Based on all this, we believe that the recent $25 lows will most likely hold, and it is a good time to start accumulating the stock. We would start with a small position and add to it on dips in the $25 range or below.
Buy Micron Technology (MU): MU is a leading manufacturer of semiconductor memory solutions, including DRAM, NAND and NOR flash memory, phase change memory and image sensors. These memory products are used in a range of electronic applications, including personal computers, workstations, network servers, mobile phones, flash memory cards, USB storage devices, digital still cameras, MP3/4 players, and in automotive applications. It dropped 35% during the second quarter, but it dropped only 8% year-to-date [YTD].
MU trades at a forward 9 price-to-earnings ratio (P/E), 0.80 price-to-sales ratio [PSR], and at 0.85 price-to-book ratio (P/B), all near the bottom of their historical ranges. The stock fell recently on account of weak revenue and earnings for the May 2011 quarter, and is currently down almost 40% from its recent high three months ago. However, gross margins improved 300 basis points in the May quarter to 22.3%, and the earnings miss being due to lower revenue and a large one-time tax expense. Furthermore, the company generated a healthy $211 million in cash during the quarter.
We believe that MU at current prices is a good long-term value buy. While fundamentals deteriorated for the most recent quarter, the stock trades at compelling valuations, and the forward indicators of demand for the company’s products are positive. The Windows 7 upgrade cycle worldwide is likely to propel a rebound in PC demand going forward, which will lead to higher DRAM and NAND memory sales. Moreover, the increasing sales of PCs with multi-core processors will also fuel the demand for more DRAM and NAND flash memory. Furthermore, while consumer PC demand may remain sluggish due to the weak economy, corporate demand for PCs and servers, and the demand for smartphones and tablets that would use the company’s chips continue to be positives. We would be buyers ahead of these positive developments, while the stock still trades at a discount. We believe that there is strong upside here to the $12 range, while the downside is limited to $6-7. Analyst mean targets are $12, with a high of $18; and of the 25 analysts that cover the stock, 18 rate it a buy/strong buy, five a hold, and two gave it an underperform rating.
Mad Catz Interactive Inc. (MCZ): Mad Catz is a leading third-party provider of accessories for all three major videogame platforms: the Sony PlayStation®, Microsoft Xbox®, and Nintendo Wii®. Its core products include controllers, memory cards and RF switches, which offer a value-priced, feature-rich alternative to OEM products; the ‘GameShark’ line of videogame software enhancements and proprietary videogames; and other premium products to enhance the gaming experience. The stock was down 35% in the second quarter, but it is still up 39% YTD.
The stock went up strongly in the first quarter based on an exclusive agreement with Microsoft to produce licensed, co-branded wireless headphones for Xbox and strong quarterly results. However, subsequent to that the company issued 8.9 million shares in April/May and the fiscal year results announced in June were not strong enough, and as a result, the stock has corrected in the June quarter. Although the stock is cheap and exhibits strong year-over-year growth, we would wait on the sidelines for now, as the stock will probably remain range-bound until the next quarterly results or another strong news catalyst can propel it forward.
Finisar Corporation (FNSR): FNSR is a provider of optical subsystems and components that are used to interconnect equipment in short-distance local area networks (LANs) is storage area networks (SANs) is longer distance metropolitan area networks (MANs) is fiber-to-the-home networks, cable television networks, and wide area networks. The stock went down 27% in the second quarter, and it is also down 39% YTD due to weakness in the optical sector and also poor quarterly results. Specifically, it missed revenue estimates and reported in-line earnings for the April 2011 quarter, and it guided down sharply both revenue and earnings for the July 2011 quarter. The stock trades at a forward 12 P/E. Earnings are projected to drop steeply to 93c in the current April 2012 fiscal year from $1.55 the prior year, and are projected to rise to $1.43 in April 2013 fiscal year. We would remain on the sidelines for now.
Clearwire Corp. (CLWR): CLWR provides wireless broadband networks for delivery of residential and mobile internet access and voice services. CLWR customers connect to the Internet using licensed spectrum, thus eliminating the confines of traditional cable or phone lines. The company offers its service in fifty U.S. markets, we well as in Europe. The stock fell 32% in the June quarter and 27% YTD,. It trades currently near its all-time lows and is down over 90% from its $35 highs in 2007. While CLWR is clearly undervalued based on historical financial metrics, and there are persistent take-over rumors, its future earnings potential is uncertain in light of Sprint’s recent 15-year network-sharing deal with LightSquared. Analysts put a median $6 price target, with a high of $20, on CLWR stock, well above the current $3.26 price. Of the 19 analysts that cover CLWR, seven rate it buy/strong buy, eleven rate it hold, and one rates it at underperform.
Limelight Networks Inc. (LLNW): LLNW provides content delivery network services for television, music, movie, software and social media industries in North America, Europe, the Middle East, Africa, and the Asia Pacific. LLNW’s architecture bypasses the busy public internet using a dedicated optical network that interconnects thousands of servers and delivers massive files at the speed of light directly to the access networks that consumers use every day, thereby assuring its customers that every object in their library will be instantly delivered to every user, every time. The stock has fallen off sharply following its March 2011 quarterly report on May 6th whereby the company beat analyst revenue and earnings estimates, and guided revenue higher for the June 2011 quarter. Analysts mean target is $8, with a high of $10, well above current $4.40 price; and of the nine analysts that cover the company, three rate it a strong buy, five at neutral, and one rates it at underperform.
Juniper Networks (JNPR): JNPR provides secure network infrastructure products and services for the deployment of services and applications over a single Internet Protocol [IP] based network worldwide. The stock trades at a forward 16 P/E, in the bottom third of its historic P/E range. Analysts mean target is $43, with a high of $50, well above current $31 price; and of the 47 analysts that cover the company, 28 rate it a strong buy, 15 at neutral, and four rate it at underperform/sell rating.
Other Big Losers: Other prominent big losers in the technology sector included Logitech Intl SA (LOGI), a Swiss manufacturer of personal peripherals for PCs and other digital platforms; Motricity Inc. (MOTR), a provider of mobile data solutions enabling wireless carriers to deliver mobile content and applications to subscribers; Powerwave Tech Inc. (PWAV), a manufacturer of antennas, boosters, combiners, cabinets, shelter and filters for wireless telecom networks; Skyworks Solutions Inc. (SWKS), a manufacturer of analog and mixed-signal ICs, amplifiers, attenuators, detectors, diodes, couplers, mixers and demodulators; Ciena Corp. (CIEN), a designer of Ethernet transport and switching systems used in network infrastructure by telecom and cable service providers; MEMC Electronic Materials Inc. (WFR), engaged in the development, manufacture and sale of silicon wafers for the semiconductor industry worldwide; Cree Inc. (CREE), a manufacturer of LED ICs, power switches, RF devices, and silicon carbine/ gallium nitride based materials; and Mips Technologies Inc. (MIPS), a provider of industry-standard processor architectures and cores that power various home entertainment, communications, networking, and portable multimedia products.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.