Tech Stock Downgrades: What To Weed Out, What To Retain

Includes: AMD, INTC, PLT
by: StockRiters

Stock investing is a time consuming activity. I spend a lot of time reading news, financial reports and studying the charts of my target companies. While I prefer to use my own research and judgment for picking stocks for my portfolio, I also pay attention to specialists' opinions. There are several ways to incorporate expert opinion into your analysis. One of the trusted ways to do this is to follow analyst recommendations. Major stock research firms have expert knowledge and data at their disposal to make superior decisions about the likely future performance of the stock. These firms not only write excellent reports about the stocks, but also constantly update their recommendations.

While analysts' upgrades can provide you with a handy list of stocks you may want to include in your portfolio, downgrades may help you to identify stocks to consider weeding out of your cache, or at the very least, watching for signs of trouble. I have picked three major tech stocks today that received analysts' downgrades. I chose to take a closer look at these because some trade on huge volumes and are very popular with investors. The Tech sector has been a hot investment destination for quite some time now. But while there are companies like Apple creating new lifetime highs, the following three stocks seem to be following the opposite path:

  1. Advanced Micro Devices Inc. (NYSE:AMD): This semiconductor company just received a rating downgrade from Longbow Research, which now holds a "Neutral" opinion of the company, down from a previous "Buy" recommendation. However, Longbow Research is not the only analyst firm to do this. Advanced Micro Devices was also downgraded by UBS earlier this month. UBS also went from "Buy" to "Neutral" for this stock. While the company has some internal issues, it is also falling victim to the somber mood prevalent in the semiconductor sub-segment of the tech industry. Advanced Micro Devices' problems are closely related to those of the PC market. Semiconductor companies are hard pressed to innovate in a way that gives them a fighting chance in the emerging tablet/smartphone era. The stock is currently trading at $3.84, down 1.54 percent, and its average 1 year target price of $5.29 does not look appealing. The company is also not the strongest player in its segment and has a pretty low operating margin. Further, it is also facing stiff competition from the British firm ARM holdings. Given the tight margins, growing uncertainty and stiff competition, I would prefer to steer clear of this stock. And of course, the recent downgrades seem to confirm my opinion.
  2. Intel Inc. (NASDAQ:INTC): Once a behemoth, the company is now facing an uncertain future. Longbow Research rates the company "Neutral," down from "Buy." However, it is not just the research firms raising doubts about the future of the company. The tech giant itself issued a warning for the fiscal third quarter of the year. Intel lowered its third quarter revenue expectations to $12.9 billion-$13.5 billion from earlier expectations of $13.8 billion-$14.8 billion. However, thanks to the company's solid R&D capabilities, relatively secure financial position and conservative debt structure, I am not ready to dump the stock just yet. The company put up a bold face at its recent Intel Developer Forum, where it demonstrated its latest technologies. Though it faces tough competition from emerging companies like ARM, which specializes in mobile technology, Intel is in a unique position to use its R&D prowess. I would also not read much into the recent sell-off by Berkshire Hathaway, which recently sold about 11.5 million Intel shares, earning a tidy profit of $60 million. The reasons why Intel shareholders should not panic are nicely discussed here. The principal takeaway is that while Buffett seems to have abandoned his Buy-and-Hold policy for Intel, that probably has less to do with Intel's fundamentals (which are very strong) than with a policy update at Berkshire. As of this writing, the stock is currently trading at $23.21, down 66 percent, and is following the market trend today. However, with the P/E ratio of 9.89, in my opinion, the stock provides a good entry point. The average P/E ratio for its industry stands at 18.
  3. Plantronics Inc. (NYSE:PLT): As of this writing, the stock is currently trading at $36.60, down 2.81 percent. Unlike the above two companies, Plantronics is actually more aligned with the mobile tech segment. However, the company is still facing a grim future. It has been downgraded from "Buy" to "Neutral" by Mizuho. Plantronics' chart also shows a bearish trend, as the stock is trading below its 200 day moving average price of $37.41. While the company shows relatively healthy financial and liquidity status, its recently reported quarterly earnings were disappointing. The company's earnings dropped from 56 cents per share to 55 cents per share for the fiscal first quarter of the year. Its revenue for the quarter also increased by a mere 3 percent to $181.4 million. With lukewarm quarterly results and recent downgrade, I am certainly in no hurry to include this stock in my portfolio. To regain my interest at all, PLT has to cross its 200-day moving average and break its resistance level. I would also wait for it to increase revenue and have an upward spike in earnings figures before diving in.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.