In part one of this series, we took a comprehensive glance at the financial sector to see where investors should consider locking in some gains in the event of a market pullback. Clearly as evident by the group's robust 21.5% gain, there is plenty to lose should sentiment shift from what is currently popular to perhaps what sectors that present better value. It is a phenomenon called sector rotation. My cautious approach centers around the fact that for as strong as the market has been in the first quarter, it might not be sustainable in the second quarter - especially considering the psychological effect that is known as "sell in May" is fast approaching.
In this article we are going to look at the technology sector, the second best performer of the market at 21.1% - second only behind financials. When it comes to technology, the primary driver has always been expectations. As such P/E ratios and the perceived ability for certain stocks to grow into their valuation is always a major concern. But it seems that was not the case in the first quarter of the year as several stocks such as Amazon (AMZN) continue to throw valuation metrics out of the window while reminding investors that its P/E of 142 is low in spite of what we may want to believe. But I know better than that. And at a current price of $195 it is one that I would consider selling in the near term and look for a re-entry possibly below the $188 level.
I don't think anyone can look at Amazon's growth expectations in such a competitive environment such as technology and not wonder how can this be possible? But the company is not alone when it comes to lofty expectations. That distinction also goes to Salesforce.com (CRM), one of the most controversial stocks on the market any time the word "valuation" comes up. The company started the year at $101 and now rests comfortably at $157 for a YTD gain of 55%. Investors would be wise to lock in some profits now leading into May when the market finally wakes up and realizes what a mistake this is. But the saving grace for Salesforce.com is that it is a pioneer in cloud technologies - the hottest trend on the market at the moment. But should that be enough to overlook the fact that the company still has negative EPS?
I don't think it should. Now I will say this, considering a short term trade on aforementioned companies due to valuation is much better than recommending a sell on a company that I think lacks a future. This brings us to embattled smart phone pioneer 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 not only does this company have no business, but even worse, it has no business trading above $10. I really don't see a scenario where it will not drop to the single digits at some point this year. Apple (AAPL) has essentially made RIM obsolete in a manner of 36 months and the sad part about all of this is that even Nokia (NOK) (remember them) now looks more like a viable company than RIM thanks to its partnership with Microsoft (MSFT).
As for RIM, I think the company has one and at most two years remaining before it suffers the same fate as Palm, the company that was "RIM before RIM." But there are other similarities on the market today, just as RIM created the smart phone market that it has now lost, Netflix (NFLX) is also on the verge of losing the streaming movie market it created. Selling shares in Netflix has been the biggest no-brainer on the market over the past year. Ever since the stock reached its high of $304 it has been a series of mistakes one right after the other. The company's growth potential has been a topic of discussion of late. But more importantly, so has the stock price. And this is where the uncertainty comes in. I have become quite uneasy of how to value the company. However, seeing that 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 since the start of the year, 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 they are willing to compete, as is evident in its recent Q4 earnings report, one that arrived better than expected. But with cable operators now opting to create their own streaming platform to compete directly with Netflix, it is only a matter of time before content costs run too high for this once proud mail order service to survive.
Technology is here to stay, there is no doubt about it. But the same cannot be said about individual gains of certain stocks that have either become overvalued such as Salesforce.com or simply cannot sustain their valuations due to lack of execution such as Research In Motion. With the volatile nature of the market and the fact that the second quarter is notorious for bringing in some headwinds, investors should consider locking in profits now and look for better entry points or elsewhere for better value.