Avoid The Fallen Dot Com Angels

by: BubbleBustInvesting

Remember the high-tech bubble of the late 1990s, when dot.com and networking company stocks rose by leaps and bounds, sometimes doubling and tripling in a single trading-day?

With the bubble busting in the early 2000, these days are gone. Some of these companies went bankrupt, while others stay very close to earth like fallen angels. Recently, however, a number of these companies have been rising in price, as they reported better than expected results. Cisco Systems (CSCO), Ciena Corp. (CIEN), JDS Uniphase (JDSU), Alcatel-Lucent (ALU) and Ariba Inc. (ARBA), for instance, they all reported better than expected results, and their stocks have been edging higher.

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Should investors jump in and pick up these fallen angels? We don’t think so, for several reasons:

1. Momentum is gone. Momentum investing is a strategy based on hype about an investment theme, a new product or a new industry that captures and captivates the investor mind - at times when money is cheap and markets are in an uptrend.

While money is still cheap in these days, momentum has shifted to other industries — like social media and web-based companies like Netflix (NFLX), OpenTable Inc. (OPEN), LinkedIn Corp. (LNKD), Youku.com Inc. (YOKU), Sina Corporation (SINA), Baidu, Inc. (BIDU) and Sohu.com Inc. (SOHU).

2. Most of these companies are left behind in the technological race, and challenged by competitors, eg., Cisco has been challenged by Juniper Networks (JNPR), and IBM (IBM).

3. Most of these companies rely heavily on government spending that is currently on retreat, as both Cisco Systems CEO pointed in the company's last conference call.

4. Most of these companies face leadership and organization issues, as they suffer from bad M&A, deals, eg., Alcatel Lucent, the merger of a France-based Alcatel, and U.S.-based Lucent, Cisco has acquired 90 companies, some outside its core business.

The bottom line: Investors should stay away from fallen Dot.com angels, as it is very unlikely that will get the chance to live a second life any time soon.

Disclosure: I am long NFLX.