Last week, economic optimism spurred what continues to be a sustained buying of equities aided by the fact that claims for U.S. unemployment fell more than expected. This was a sign that companies were once again hiring and layoffs were on the decline. While complaints about the perceived slow growth continues, the fact of the matter is, not only is the economy indeed in recovery mode from the 3-year recession, but the unemployment rate has recently dropped to 8.5 percent in December, its lowest level in nearly three years. The frustrating part about all of this is that no matter how well things appear to be progressing in the U.S., investors are still unable to escape Europe.
On Friday, stocks were dragged yet again by clamor over the Greek bailout as well as a downgrade of nearly three dozen Italian banks. Though it seems earlier in the week that progress was being made towards an agreement, more Greece concerns surfaced after euro-zone finance ministers called the new austerity deal into question, saying it does not go far enough. He also went on to say that they would need to see more spending cuts before signing off on a new 130 billion euro bailout.
While I appreciate the fact that global issues are often legitimately discussed, I think the greater concern should be that the U.S. economy is lacking in autonomy. The European shackles remain a huge burden. I think this feeling was also the consensus on the market throughout the entire week as investors largely took a wait-and-see approach, since it appeared that stocks didn't change much. But it was evident this week that the technology sector continues to be the king on the Street.
Reasons to be cautious
On Friday, all of the major indices were down. However, for the week, the S&P fell 0.2 percent and Friday's losses snapped a three-day string of gains. The Dow fell 0.5 percent for the week while the Nasdaq fell less than 0.1 percent. There continues to be some evidence that the market is due for a pullback and reasons for investors to be cautious - not the least of which is the fact that since October of last year, the market has seen a 20 percent rise while also showing less volatility.
I am not suggesting that investors should dump all of their stocks. But there are a few within each sector that are worth investigating to see where gains should be immediately locked. The first group that we are going to look into is technology - which is currently outperforming all of the other sectors.
Research in Motion (RIMM)
Research in Motion ended down on Friday almost 3 percent to close at $15.44. Unfortunately for RIMM, this is the wrong time to be expecting a market correction. It's a foregone conclusion that the company has lost the battle in everything that is relevant to it. For this reason, 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 percent 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 the stock's price. And this is where the uncertainty comes in. I have become quite uneasy about 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.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SIRI over the next 72 hours.
Additional disclosure: Author may initiate a short position in the stocks mentioned at any time