Seeking Alpha
Contrarian, macro, hedge fund manager, Emerging Markets
Profile| Send Message|
( followers)  

<< Return to Part I

For the second part of my performance review of both my recommendations here on Seeking Alpha and my trades with my hedge fund Nomadic Capital Partners, I break down my best and worst trades involving tech stocks. Technology is a sector that creates some of the best opportunities for stock pickers because the speed of creative destruction within the industry.

Despite economic chaos and the volatility of the markets in 2011, the technology sector has reflected underlying fundamentals compared other equities that are more tied to the "risk on/risk off" trade. As a result, tech provides opportunities for investors to still trade based on bottom up fundamentals.

Winners

Shorting Netsuite (NYSE:N) and Salesforce.com (NYSE:CRM): These cloud companies have some of the most overpriced valuations in the entire stock market. Both stocks have Forward P/E ratios of 61 and 198 respectively, price to free cash flow ratios of around 140, and zero to negative return on investment capital. Momentum kept these stocks flying up to new highs, but once the economic outlook begin to show signs of uncertainty, these stocks fell harder than the sector (NYSEARCA:XLK). I expect these stocks to continue to sink to more realistic price valuations -- or at least to the levels of a more profitable cloud leader like VMWare (NYSE:VMW). Netsuite specifically stands out as a short because the company has failed to earn or even make progress towards profitability over the past three years.

Long Aerovironment (NASDAQ:AVAV): The modernization of the military has been a profitable trend for investors as unmanned drone producer Aerovironment has gained 10.3% since the publishing of my column and respective purchasing of the stock (SPY down 7.92% over same period). As physical troop occupation of the Middle East and foreign bases declines among the US military, expect the slack to be carried by drones. This has already been exemplified by the US's involvement in Libya. Expect this trend to continue as the use of robots such as drones for combat operations is more cost-efficient for national defense both in terms of finances and human lives. I remain bullish about Aerovironment because of the continued demand for drones and its growth in the electric car charging station business.

Long Intel (NASDAQ:INTC): Intel has been a strong performer this year, and has gained 10% (before dividends), while the market has remained flat. Intel's stock is in a unique position by allowing capital gains opportunities from the growth of its emerging markets PC business while providing a high (especially for a tech company) dividend yield of 3.55%. My outlook remains bullish on Intel going into 2012.

Bearish outlook for K-12 Inc. (NYSE:LRN): My bearish outlook for K-12 has already been substantiated, as the stock has plummeted 25% since my column on November 30. The primary drivers have been weaker than expected earnings and a New York Times investigation that has highlighted academic underperformance among online students.

As I wrote previously, online primary and secondary education will fail to be a viable option for students until a school establishes a solid college admissions track record and a reliable method to keep students academically honest. K-12 has so far done neither of these, so investors should stay away until the company makes clear progress on these fronts.

Losers

Long 3D Systems (NYSE:DDD): 3D printing is an excellent technology that may one day cause the next industrial revolution in the 2020s. However, optimism on 3D Systems was a little premature as the stock is down 14% since my entry (stopped out later) and article on the company. However, the financial fundamentals and the growth potential are still present for long run outperformance. However, the market still needs to see 3D printing to have practical applications beyond prototyping in order for the industry and 3D Systems to truly break out.

Long Nintendo (OTCPK:NTDOY): I thought Nintendo was cheap when I wrote about in June, but now it's far cheaper, with a 40% decline since then. Nintendo still has popular and valuable gaming franchises and plenty of cash, but lacks the killer app in the next year to trigger a reversal of its current downtrend. I think the way to profit from Nintendo is purchasing a few weeks before the release of the Wii U, as Sony and Microsoft are not releasing next-generation systems for a while to compete with it. Until then, keep this stock on a watch list, but do not pull the trigger.

Source: Best And Worst Calls Of 2011, Part II: Technology