MARKET OVERVIEW

Every morning I scroll through various news feeds to see what the mainstream media has to say about the state of the financial markets, and I had to grin when I saw this blurb on the homepage of Yahoo Finance this morning: “A sell-off of Internet and technology stocks that started on Wall Street spread around the globe on Monday, with tech companies hammered by worries about excessively high valuations.”

On the one hand, they got it right. As we have said all along, the tech sector is primarily comprised of two types of stocks: grossly overvalued, and somewhat undervalued. Already we have made a huge profit from our now-closed short position in 3D Systems (NSDQ: DDD), a big profit from shorting Amazon.com (NSDQ: AMZN), a mild profit in Netlflix (NSDQ: NFLIX) thanks to its $100 plunge over the past thirty days, and our short sell recommendation for Facebook (NSDQ: FB), while only at breakeven currently, is looking better all the time as it spends wildly on dubious-at-best acquisitions.

On the other hand, they got it wrong. Not all tech stocks are selling off, and in fact some of them are quietly racking very nice gains. As we have been telling you all along, the tech sector has become a two-tier market in 2014, so it is critical that you know which ones to avoid and which ones to pounce on. To simply paint the entire tech sector with a single brush creates the kind of mispricing opportunities that our system is designed to capitalize on.

One sure sign of a near-term market top is when companies in an industry begin to spend more time on trying to take market share away from a competitor’s existing product, rather than innovating an entirely new product line on their own. And in short, that is what we are beginning to see now as evidenced by several recent announcements.

When tech companies follow instead of leading it is usually a bad thing because investors fear this means that these companies have nothing left in the tank for future growth. Of course, in the past some tech companies have done very well following a technology another company invented and then extending that technology via innogration to overrun what the tech industry terms the “first mover” (witness Apple’s usurpation of the cell phone market originally pioneered by Blackberry).

Last week we saw two huge tech companies announce offerings which can only be viewed as adding technologies to their core product set which were invented elsewhere – and several years ago, we might add. Amazon.com (NSDQ: AMZN) announced the introduction of Fire TV, which follows Apple’s TV, Roku and Google’s (NSDQ: GOOG) Chromecast. Presumably, Amazon’s logic is predicated on the belief that no one has developed an Internet-based TV product so far which is really good, so they might as well be the ones to do it.

Amazon is correct in that Internet TV is still hokey and lackluster. Only young people with a lot of time on their hands have embraced eTV. So if the field is wide open then Amazon should enter the field and provide something which resembles a regular TV in functionality. And by ‘resembles’ we mean that you turn it on and it works without the user needing to enter a lot of instructions. The only thing a consumer should have to think about is which channel they want to watch. No company has produced that yet.

The question we need to ask is, is Amazon the company that can do this for eTV? Based on Amazon’s current track record the answer is probably not. Amazon has upgraded its own eReaders to compete with the mainstream tablets but have not made any serious inroads. Their core book readers who use the Amazon readers for books are buying them, but Amazon is not converting the general public. Why? Because Amazon’s tablets are good at reading books but do little else well in the other areas for which people buy tablets.

Therefore, despite Amazon having entered a clearly up-for-grabs market segment, they don’t look like the winners to us. The real reason is because the content – as with the other eTV providers – is sketchy. Some older movies and TV shows are readily available, but not real-time TV. The TV market will be cracked, but only through the utilization of the Internet to provide current television programming – and not the old stuff. No company has figured out how to get NBC on their box yet. Given how little Amazon pays for TV content – I very much doubt Amazon will solve this equation, either.

Microsoft (NSDQ: MSFT), on the other hand, just brought out a new version of Windows with a feature directly from Apple’s innovation factory. Apple (NSDQ: AAPL) brought Siri, the talking assistant to their smartphones several years ago. Therefore, one might wonder why Microsoft is getting excited about their entry strangely called Cortana. We think a shorter name would be better for an assistant, but the real question here is why would Microsoft spend millions developing what Apple already has? And not only does Apple already have it, but has gained tremendous market share as a result of building it into a solid product that is selling very well to boot.

The reason why this is a very good bet is because Microsoft is working to provide just enough quality and functionality to steal market share from Apple. They did this with their PCs two decades ago and are trying the same approach now. If Apple turns a blind eye this could work out well for Microsoft. Though we doubt Apple will allow history to repeat, it could still work well for Microsoft if they can beat out Samsung as the lower-cost smartphone provider. Samsung has some serious patent rulings against them which could allow Microsoft to be the less sexy and lower cost smartphone provider. The real response to be looked for from this new development is from Samsung and not Apple.   

We think a better analogy for the tech sector at the moment is musical chairs, as each company scrambles to grab a shrinking number of seats. In that sense the market is overvalued on the whole, the result of several grossly overvalued companies driving the index value up. However, do not misinterpret that as meaning there are no undervalued tech stocks to own at the moment; our Equity Trades Portfolio shows you how to profit from some of the more grossly overvalued tech stocks via short selling, while our Investments Portfolio is comprised of those stocks that are currently undervalued relative to the overall market and represent solid long term buys.

NASDAQ Composite Index:

Friday, April 4 = 4,127.73

Year to Date = – 0.4%

Trailing 7 Days = – 0.7%

Trailing 4 Weeks = – 2.8%

PORTFOLIO UPDATE

This morning’s dire statement from Yahoo Finance notwithstanding, in fact several of our Investments Portfolio stocks are trading above their buy limits meaning they are now a ‘hold’ unless/until they drop back down below their respective limits. 

Included in this group is Apple (NSDQ: AAPL) currently $6 above its buy limit price of $525, Intel Corp (NSDQ: INTC) trading slightly above its buy limit price of $26, Oracle (NSDQ: ORCL) also less than a dollar above its buy limit of $39, Seagate Technology (NSDQ: STX) more than $3 above its limit price of $53, and Western Digital (NSDQ: WDC) more than $4 above its buy limit of $86.

However, there are five other stocks in this portfolio that are still below their buy limit levels, so there is still time to buy CA Technologies (almost $5 below its buy limits price of $36), Cisco (NSDQ: CSCO) a little over a dollar below its limit price of $24, Microsoft (about $2 below its buy limit of $42), Qualcomm (over $6 under its limit price of $85), and Ricoh (about $3 below its limit of $60).

However, most of the positions in our Equity Trades Portfolio have breached their respective limit prices so there are only a few active recommendations for you to execute at the moment.

In addition to closing out our short position in 3D Systems (NYSE: DDD) for a big gain recently, short sell recommendation Amazon.com (NSDQ: AMZN) has fallen below our revised sell limit price of $325 but only mildly, trading at $323 this morning so you will probably get a chance to open a position in it before it begins its next leg down to the sub-$300 range. Also, Netflix (NSDQ: NFLX) has taken a dive below our sell limit price of $360 so it is now a hold as well (off more than $100 from where it was only one month ago!).

That means the only current short sell recommendation still open is Facebook (NSDQ: FB), but it is less than $2 above our sell limit price of $55 so there is still time to act on this recommendation but that window is closing fast.

On the buy side, EMC (NYSE: EMC) is more than $3 above our buy limit price of $24 so it is currently a ‘hold’, as is Lenovo (OTC: LNVGY) but it is less than a dollar above its limit of $22 so you still may get a chance to buy it on mild weakness.  Likewise, Riverbed Technology (NSDQ: RVBD) is less than $2 above its buy limit of $18, so you may get a chance to grab it if the entire tech sector sells off.

That means Symantec (NYSE: SYMC) is the only Equity Trades Portfolio buy recommendation currently trading below its limit, about $2 under the $22 ceiling we have placed on this speculative position.

The good news in all of this is that over half of our portfolio recommendations are not only profitable, but have exceeded our maximum entry level price and are deep in the black. Not bad during a period of time that has seen the overall stock market go nowhere.

More good news is that later this month we will be adding a third portfolio to our coverage, consisting of “up-and-comers” that offer enormous upside opportunity in the areas of Big Data and The Cloud. We will introduce it in this month’s issue of Smart Tech Investor on April 21^st, so keep your eyes out for several new stock recommendations in two weeks!