Tech stocks hitting bottom
Despised like the banks were a few weeks ago, tarnished tech has been sold off and downgraded relentlessly. But it may finally be too late to sell.
By Jim Cramer, TheStreet
Does the seemingly endless sell-off in tech stocks make sense, the selling that I believe will resurface again after Monday's Nasdaq ($COMPX) snap-back? Is the liquidation rational given that worldwide growth seems to be coming back, according to China, India, Brazil and now the EU?
I want to differentiate two things here. First, yes, it made sense earlier this summer. I know I was too bullish on the group. I didn't see the zero-sum possibilities of Apple (AAPL), believing that other stocks would be able to rally even if Apple went higher. I thought that the mobile Internet tsunami and cloud computing could lift more boats than it did, particularly semiconductor boats, but it turned out that almost all were leaky. I was less concerned with seasonality than I should have been. The group performed much more horribly this summer than I anticipated, in part because I think it was far more over-owned than I thought.
And the group is very tarnished by having such a poor record of returning capital to shareholders. The techs in general offer mediocre dividend protection. The endless tech buybacks have empirically done nothing except make it easier for executives to sell -- and the owners are under such liquidation pressure from redemptions that there may be no choice to sell.
Intel (INTC) bottomed when it hit 3.5% yield. Otherwise I think it could have gone much lower. Microsoft (MSFT) rallied nicely Monday because of hopes for a larger dividend. In general, though, these companies have nothing defensively to fall back on. (Microsoft owns and publishes MSN Money).
The merger-and-acquisition convergence doesn't help either. When Hewlett-Packard (HPQ) buys 3Com, it is going head to head with Cisco (CSCO). When HP buys Palm (PALM), it's trying to break from Microsoft. When Oracle (ORCL) hires Mark Hurd, it's trying to destroy HP. When Intel buys McAfee (MFE), it's trying to stop Microsoft and break into cell phone chips, hurting ARM Holdings (ARMH).
When Dell (DELL) and Hewlett-Packard tell you they dominate the high end but then engage in a bizarre bidding war to buy 3Par (PAR), then you know they are not armed to the teeth against EMC (EMC) like you thought; maybe they will be now. HP buys ArcSight (ARST) and, well, who knows what it does, but HP is doing it to make other companies' lives harder in net security. There's too much warring and destruction among the group's leaders.
Worse, there's been no consolidation in most areas of hardware and semis that should matter. There are still way too many tech companies out there.
Sure, Teradyne (TER) managed to cobble together a bunch of companies to dominate testing. But think of all of the nonintegrated semi equipment plays: KLA-Tencor (KLAC), Novellus (NVLS), Applied Materials (AMAT), to name some visible examples. Think of all the plain old semi plays: Texas Instruments (TXN), National Semi (NSM), Analog Devices (ADI) -- again, just a sampling. Drive and drive-related: Western Digital (WDC), Seagate (STX), Marvell (MRVL). There's Xilinx (XLNX) duking it out with Altera (ALTR). Handsets: Nokia (NOK), Samsung, Motorola, Apple, Research In Motion (RIMM).
I could go on and on. We have so, so many players and so little dedicated investible tech money to spread around, that it is no wonder they can't advance like other sectors.
So why ever buy?
Here's what could be better than we think. First, seasonality is now in tech's favor. September is when you should be buying the group. Second, the downgrades, which seemed nonstop, may now be behind us. Third, while they may not have the emerging-market growth of the capital goods players, nor the leverage that comes from an increase in sales as layoffs lower costs -- most of these companies have not taken out costs aggressively -- they do sell into China and India and Latin America and now a rejuvenated EU. (I am just presuming, like you, that the U.S. is awful.)
We also know that there are some long-term themes that have growth -- cloud computing, video over the Net, massive storage -- and these affect more than just a handful of stocks that have been going higher. We know that the companies in that space really have growth. We also know that PCs and netbooks are not a declining market. They just aren't growing as fast as they did and can re-accelerate in an economic recovery. They are in cyclical weakness, not secular decline. We know that there are other tech companies besides Apple that can do things right, and they aren't just named F5 (FFIV), Salesforce.com (CRM), Citrix (CTXS), VMware (VMW), Akamai (AKAM) or NetApp (NTAP). The companies are cash-rich with options to do things right when the opportunities strike -- or get struck.
In other words, we have some long-term themes, we have a hated group that has been downgraded galore, we have some estimates that could prove to be too low if the economies of the world get stronger, and we have the right time of the year to own the group. Therefore it may, at last, be too late to sell.
A positive Cisco analyst meeting and a strong Oracle quarter, plus Apple's taking out its 52-week high, just might reignite the group. I think the only people left to dump these stocks are the accounts that need to raise cash badly to pay out redemptions.
Bottom line: Enough is enough. The selling is stopping, even if the buying after Monday's love-fest may be tepid. Yes, there is a vacuum of earnings info ahead of us, but don't discount either Cisco's or Oracle's words as clarions to get back in the group at one of the most hated levels I can ever recall.
I was wrong about the group. I could be wrong again. Now, though, because of the declines, the changes, the seasonality and the cyclical recovery, the odds are much more in tech's favor. In sum, they remind me of the banks just a few short weeks ago, when they couldn't be given away. That was the bottom. And I think we’re at that moment for tech, too.
At the time of publication, Cramer was long Apple, Cisco, EMC, Intel and Weatherford.
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The company has made at least 4 acquisitions in the space, and few people have paid any attention.
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