Why These 4 Tech Stocks Should Be Sold Before They Drop

by: Richard Saintvilus

You'll always know that you are in a bull market whenever each trading day follows one where records and weekly, monthly and yearly highs are always mentioned. Earlier this week, for example, where both the Dow and S&P 500 reached key decade-old milestones and yet another on Friday as the Dow surged higher closing near its 4-year high. However, this time it was the Nasdaq's turn, after its index hit an 11-year high. This time the optimism was spurred job growth. The U.S. economy created jobs at the fastest pace in nine months in January and the unemployment rate dropped to nearly a three-year low of 8.3%, the government said.

Still not convinced we are in a bull market?

Consider this, across all of the sectors trading on the market, there have been 450 separate stocks that have recently reached 52-week highs. This is the highest reported total since last July. In 2012 so far, it seems to be an everyday occurrence. Let's put aside a company such as Apple (NASDAQ:AAPL), which continues to rise and will likely do so through the quarter. Aside from Apple, looking across all of the indices, the signs of being overbought was apparent on a great majority of the stocks that are showing such momentum. A recent analyst suggested that 74% of stocks were over their 200-day trading averages. The question now becomes, is it time to be fearful in the market if you follow the preaching of Warren Buffett?

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Clearly the year to date sector performance above shows that investors are not only excited about what lies ahead in 2012, but have become decisive about what industries matter the most. So again, with such early gains and with the broader indices having approached record territories, should investors be in a fearful mode and begin to lock in some profits as the bear market may just be around the corner? This question is not that difficult to answer if one has studied recent history.

Trading the sector gains

They say "a rising tide lifts all boats." There is unquestionable truth in this theory, especially in the stock market, as evident by this bullish run we are now seeing. So when it comes to stocks, we need to understand that a strong economy can propel even the most challenged business models.

In this article, which is the first of what will be a series of looking within each sector, we are going to try to identify certain stocks that might be on the verge of a pullback and ways to possibly mitigate some risk and exposure to losses. The benefit of this is that if you are on the sidelines, hopefully you will be able to get an idea of a possible good entry point. The sector that we are going to investigate first is technology.

Trading the techs

Research in Motion (RIMM)

For Research in Motion, I continue to think that the prudent thing to do is to take profits before the market realizes that its new CEO is not really new. The stock is up 17% on the year, and though the company has recently made a leadership change, there is evidence that maintaining the status quo will be its method of operation. This is a strategy that has yielded neither success nor is it a cause for optimism. Instead, until the company can come to terms with the error of its ways and forget about its past, the stock becomes highly speculative; its fundamental position in terms of cash, notwithstanding.

RIM's stock may only be two quarters away from dropping below $10, absent any new attainable competitive strategy. One of these strategies: Aside from devoting its attention to services, the company should consider an acquisition. Sirius XM (NASDAQ:SIRI), although unlikely, would be a good acquisition candidate. This point has been made once before. This would separate RIM from its dying enterprise footprint and further its own BBM Music Service strategy - one that now has a new $5 a month cloud-based offering.


Amazon's disappointed investors early to possibly surprise them down the road. This is a bet that the company has placed, and one that I think will certainly pay off. On Tuesday, the company reported fourth quarter numbers that included a 57% decline in profit. It said net income for the quarter ended in December fell to $177 million or 38 cents a share, from $416 million, or 91 cents a share in the same period a year earlier, while revenue climbed 35% to $17.43 billion.

The disappointment came as Wall Street analysts were expecting the company to report earnings of 17 cents a share for the quarter and $18.25 billion in revenue. During the conference call, Tom Szkutak, the company's CFO, defended Amazon's perceived lack of fiscal control by suggesting that it must move aggressively to take advantage of new opportunities. I think this disappointment will remain fresh on investor's minds and within any market pullback, the stock may drift back to where it ended December at $173.


Speaking of Netflix, its growth has been a topic of discussion of late. But more importantly, so has its stock's price. And this is where the uncertainty comes in. I have become quite uneasy of how to value the company. However, seeing as it has surged over 80% on the year, investors should take profits now - without a doubt. As great of a run as the stock has experienced, questions still remain about the company's management and its ability to run its business effectively.

To its credit, Netflix management is doing its part to show that it can run its business effectively, as is evident in its recent Q4 earnings report, one that arrived better than expected. For Netflix it was like night and day from one quarter to the next. The company said that it has gained more than 600,000 subscribers in the fourth quarter. This compares to the 800,000 that churned out in the third quarter, which resulted in the stock plummeting to its recent lows. Things are indeed starting to look up, but strictly from a valuation standpoint, I continue to feel that the recent gains should be immediately locked in and investors will soon get an entry point under $100.

CA Technologies (NASDAQ:CA)

Software giant CA Technologies surged in January. The stock started the year at $20 and now sits just under $27 for a gain of almost 30%, while making new 52 week highs during the past several sessions. The question is, what has been the catalyst and is it likely to continue? The company is one of the largest independent providers of IT management software. Its shares started to climb when it reported third-quarter earnings that surged 32% while also announcing plans to raise its annual dividend to $1.

I can't help but realize that the surge is due to the euphoria over the dividend itself, while there has been no underlying fundamental change in its operations to suggest that the gains are sustainable. That being said, I will concede that its earnings were indeed very impressive. The company's sales grew 10% to $1.2 billion - the second straight quarter of double-digit growth. It now expects profit for fiscal year 2012, which ends in March, to grow 11% to 13%. While it is fair to expect more upside, I suspect on any market pullback the stock may test its 50-day moving average, which is currently at $22 per share. This would be the entry point to target.


Thank you for reading, and in the next piece we will investigate the financial sector and see which stocks might be on the verge of a pullback.

Disclosure: I am long SIRI, RIMM.