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Technology stocks declined nearly 4 percent last week, cutting the year-to-date gains in technology stocks to 5%. The Nasdaq was previously up as high as 20% in April prior to the drop in May. With the technology sector on a decline, investors need to ask which companies face further selling pressure. Five companies that underperformed the Nasdaq index last week are illustrated below:

(click to enlarge)

(Chart Source: Yahoo Finance)

Facebook (FB) is an example of a company to avoid. Until the lockup period expires, shares will continue to face downward selling pressure. Groupon (GRPN) would be an appropriate company to look at, to illustrate where Facebook shares may go. Groupon closed at $9.53 recently, down 68.88% from its peak. Six months ago, on November 4, Groupon's IPO was considered a success, as the company sold 6% of its shares. The IPO pricing strategy helped give shares an initial pop. On June 1, over 600 million Groupon shares were free from restrictions, giving insiders the opportunity to sell shares. Groupon shares dropped 8.93% on the day.

Facebook sold 421 million shares when it went public. In 91 days after the IPO date, insiders will be free to sell additional shares. The insider expiry lockup period post-IPO may be summarized as:

  • 91 days: 268 million shares
  • 91 - 181 days: 137 million shares
  • After 181 days: 1.2 billion shares

Total: 1.605 billion shares.

When options began trading last Tuesday, May 28, the put/call ratio started at 5 to 4. With a market capitalization of $59.27 billion and a 2012 projected profit of $2.69 billion, Facebook currently trades at 22 times sales.

Shortly after Research in Motion (RIMM) was suggested to be worth $8.35, the company warned that it would report a loss. RIM also hired bankers to help with a strategic review. Cramer was bearish on RIM because it is now losing money, and warned that investors should not speculate on takeover whilst ignoring declining fundamentals. RIM closed recently at under $10. The company launched a QNX 2.1 beta for Playbook last week. The update improves portrait mode and improves on Android app support. Android apps previously ran on a single window, but will now run in separate windows. The camera and in-app payments is now open for apps. Other improvements include portrait support for email, calendar, and contacts, full device encryption, and improved HTML5 support. Playbook 2.1 is expected to have a short-life, since the Blackberry 10 operating system will be supported on the device when it is ready.

In the solar energy space, First Solar (FSLR) is a value trap. Cuts in government subsidies and a poor earnings report were reasons to avoid First Solar. Competitor Yingli Green Energy (YGE) reported a loss in its earnings report. The company lost $0.24 per share, compared to the $0.18 consensus estimates. Relevant for First solar was that Yingli shipped 44.4% more photovoltaic modules compared to the previous quarter. Gross margins were 11.5%. First Solar reported gross margins of 15.4% in its Q1, down 5.5% from the previous quarter. First solar increased its earnings forecast to $4 from $3.75 to $4.25 for 2012. Still, investors should be cautious. It is clear that margins will continue to be a challenge for First Solar for the rest of the year.

After peaking at around $6, Brocade Communications Systems (BRCD) closed at $4.46. Brocade saw revenue increase for its data storage products in its last quarterly report. Revenue declined for both global services and Ethernet products. In its earnings call, Brocade expects to report strength for its 16-gig SAN. Its entry level 6505 switch will also gain momentum.

In 2010-11, many Chinese-based RTOs (Reverse Takeovers) listed in the U.S. markets proved to be fraudulent. The event undermined confidence for companies based in China. While Ctrip.com International Ltd. (CTRP) is a sound business, investors continue to be weary for Chinese-based companies. CTrip.com closed at $17.84, and is close to a 52-week low. Investors turned sour on the company ever since trading shares up nearly 5% after its Q1 report in mid-May. In its most recent earnings report, CTrip.com reported an increase of 19% in revenues year-over year and $0.28 per share in earnings. The company forecast revenue growth of 15-20% or $148.4 million to $154.8 million for the current quarter.

Source: 5 Technology Companies To Avoid Now