Value Added


4 Tech Stocks to Sell Now

Steven Goldberg

Technology companies either innovate or they stop growing. These firms are losing momentum.



A high valuation isn't the only thing that can alert you to a stock being a potentially bad investment. Unless a stock's price is ridiculously cheap, you also want be wary of businesses with poor growth prospects. In technology, that means avoiding stocks of companies that lack strong barriers to competition.

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In my column last week, I cited five "old tech" companies that Grady Burkett, associate director of technology analysis at Morningstar, considers attractive because of their low prices relative to earnings, sales and other measures. In this week's column, I describe four tech stocks he'd avoid.

If you own any of the four discussed below, consider selling them -- quickly. Share prices and related data are as of February 27.

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Brocade Communications Systems (BRCD) has one healthy but mature business. It makes storage-area-network switches. Businesses with multiple servers use these switches to move traffic among them. The big negative: Burkett thinks that business will grow only 3% annually.

Brocade's second business involves the Ethernet, the technologies used for local area networks in home and business computing. The problem: Cisco Systems (CSCO) is a much bigger and stronger competitor in this field. Burkett says Brocade is pouring money into its Ethernet business. At $5.86, the stock sells for 10 times the 57 cents per share analysts on average expect Brocade to earn in the fiscal year that ends in October. That's not especially expensive, but Brocade's Ethernet business looks like a big loser.

F5 Networks (FFIV) is a remarkably similar story. The company makes switches that distribute traffic among servers to ensure that a business's Web site or application doesn't crash. As more and more applications are housed on the Web, the business is growing smartly. But you guessed it: F5 competes directly with Cisco. Cisco has closer relationships with far more businesses and can spend much more on research and development.

What's more, F5 is wildly overpriced. At $128.29, its price-earnings ratio is 29, based on estimated earnings of $4.48 per share for the fiscal year that ends in September. That's well above the 21% annual earnings growth that analysts see over the next three to five years.

Shares of Research in Motion (RIMM), which have tumbled from $70 a bit more than a year ago to $14.42, look tantalizingly cheap. They trade at just 5 times estimated earnings of $2.89 for the fiscal year that ends in February 2013. The problem for the maker of the once-ubiquitous Blackberry mobile phone, Burkett says, is that earnings are shrinking as the Blackberry rapidly loses ground among both individuals and businesses to Apple's iPhone and products that use Google's Android operating system (analysts expect profits of $4.15 per share for the year that ends on February 28).

Tech companies in the most precarious position, Burkett says, are those whose customers can switch to other providers with minimal or no costs (monetary or otherwise). Research in Motion is in that unenviable position. Unless it can come up with new blockbuster products to reclaim momentum from Apple and Android supporters, its stock will remain in free fall.

Seagate Technology PLC (STX), a leading maker of computer hard drives, was a big beneficiary of the flooding in Thailand last year. That's because the flooding badly hurt production of rival drive manufacturer Western Digital (WDC). That, in turn, allowed Seagate to command unusually high prices for the drives it sold to computer makers. But Western Digital will soon have all its production capacity back on line, and Seagate's selling prices will fall. Longer term, says Burkett, Seagate faces additional competitive pressures. Seagate, at $26.71, sells for just 3 times estimated earnings of $8.60 per share for the fiscal year that ends in June 2013. But don't let the ultra-low P/E fool you. With cyclical companies of this nature, a low P/E is often a signal to sell rather than to buy.

Steve Goldberg (bio) is an investment adviser in the Washington, D.C., area.



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