MARKET OVERVIEW

The past month has been pretty tough on the tech sector. The Nasdaq Composite Index is off almost 7 percent over the past four weeks, with half of that decline occurring during the past week. On Friday the index closed below the “psychologically important” 4,000 level at 3,999.73, thanks in no small part to continuing weakness in Amazon.com (NSDQ: AMZN) which dropped 9 percent in just two days, Netflix (NSDQ: NFLX) off 8 percent over that same 48 hour period, and Facebook (NSDQ: FB) down 6%.

Of course, those three stocks happen to represent the three open short-sell recommendations in our Equity Trades Portfolio, so we are profiting at their expense.  But were there any winners in the tech sector last week?  Why yes, as a matter of fact there were, including recent Equity Trades Portfolio buy recommendation Lenovo Group (OTC: LNVGY) which jumped 3 percent from Wednesday to Friday on news that it has become the world’s largest PC manufacturer, and intends to also become its biggest producers of servers.

As we reported a few weeks ago, Lenovo is acquiring IBM’s server business for $2.3 billion, which will immediately add almost twice that amount in annual income to Lenovo’s top line revenue. But if IBM thinks being in the server business is a bad idea, why is this good news for Lenovo? The explanation has to do with the regional economic subsystems operating within the global economy.

China is one of the few areas of the world where the PC market is still growing, along with demand for servers. And while IBM has a relatively small share of the Chinese market, Lenovo controls an astonishing 38 percent of the market. As a result, it is not as sensitive to the competitive forces that quickly squeeze margins in the United States and other developed markets.

And it’s not just China that offers intermediate-term growth opportunity to PC hardware manufacturers; India and Brazil, similar to China in terms of possessing a huge population that is only recently catching up to the internet revolution, also are experiencing double-digit growth in demand for PCs and servers. So while it makes sense for IBM to exit this business, it makes just as much sense for Lenovo to aggressively embrace it.

Therein lays one of the key insights for investing in tech stocks during the current inflection period: what is true for a business operating in one part of the world may not be true for another company competing in a different region of the world. Thanks to globalization we tend to think of the market for most things – including tech stocks – as being ubiquitous, when in fact it remains highly fragmented and regionalized.

The lesson to be learned from all of this is to not buy tech stocks indiscriminately, but to understand the specific business segments each company is in and what regional markets they serve. Painting all tech stocks with same brush – as the mainstream financial media prefers to do – can be a costly mistake. Yes, a lot of tech stocks became grossly overvalued last year, but there are many that were ignored and can provide savvy investors with excellent returns in 2014.

NASDAQ Composite Index:

Friday, April 11 = 3,999.73

Year to Date = – 3.5%

Trailing 7 Days = – 3.1%

Trailing 4 Weeks = – 6.7%

 

PORTFOLIO UPDATE

Using the NASDAQ Composite Index’s return of -3.1 percent last week as our benchmark, how did our Investments Portfolio recommendations hold up by comparison?

Apple Inc. (NSDQ: AAPL): -0.7%

CA Technologies (NSDQ: CA): -5.9%

Cisco Systems (NSDQ: CSCO): -1.7%

Intel Corp. (NSDQ: INTC): -1.2%

Microsoft Corp. (NSDQ: MSFT): -1.5%

Oracle Corp. (NYSE: ORCL): -1.2%

QUALCOMM (NSDQ: QCOM): -0.7%

Ricoh Company (OTC: RICOY): -2.7%

Seagate Technology (NSDQ: STX): -2.9%

Western Digital (NSDQ: WDC): -1.6%

As you can see, nine of our ten stocks were down less than the overall index, and the average decline of 2.0% was a third less than how the index performed. Of course, like you we would prefer that our stocks go up every week, but that’s not how it goes in the stock market. The way you make money over the long haul as an investor is by owning stocks that outperform during good times and bad, which is exactly what this portfolio is doing.

REALITY CHECK

The Internet turns 25 this year, so we thought we would take a moment to reflect on what has changed since then.  And if you don’t think the internet has impacted your life very much since Al Gore, oops, we meant Tim Berners-Lee,  created it in 1989, here is our STI’s list for our top ten major changes as a result of the Internet: 

1)      Fact checking: Disagreements of a factual nature no longer need to simmer for hours, days and years. With the advent of search engines, arguments with your Uncle Dave over who drove in the winning run in the 1987 World Series can be settled in less than a minute now!

[A bit of a trick question: Greg Gagne drove in the winning run in the sixth inning, but Dan Gladden drove in the final run in the eighth inning; hence Uncle Dave’s confusion]

2)      Weather: What to wear for the day ahead? Easy; just look at your smartphone or PC and it can tell you exactly what is in store for you from a temperature perspective. True, the weather prognosticators still get it wrong a few days in advance but not the day you are headed out!

3)      Directions: Is it possible to get lost anymore? Yes, of course your GPS App could flake out on you or your smartphone battery may run out of juice, but these days you have to work at the excuse that you got lost. You are probably better off going with “the car ran out of gas” or “I just signed up for Obamacare” as your reason for being delayed.

4)      Retail: Is Walmart on the verge of becoming passé? I don’t go to stores anymore unless I can’t find it online first. That may change when I have to pay sales tax on my purchases, but for now Walmart is beginning to look like Sears to me.

5)      Travel: Ever use a travel agent anymore?  I used one to book my honeymoon in 1983, but I suspect when my kids get married they are more likely to use an internet service like Kayak.com to pick out a hotel and make flight reservations (but with the way kids are these days, they may just decide to stay home for a week and binge watch the first three seasons of Hawaii 5-0 and pretend like they actually went there instead).

6)      Crime: There are thieves in your neighborhood every day. No, not the one where you live but the one where you store your financial information. Thieves are out in full force trying to break into your computer, and fighting cybercrime has become a major growth industry.

7)      Newspapers: I still read The Washington Post every morning (recently purchased by Amazon’s Jeff  Bezos, for reasons no one has been able to clearly articulate yet), but circulation counts for most major newspapers are dropping fast .  Hopefully the newspaper industry won’t disappear altogether, but its consolidation is far from over. On the plus side, my wife wont’ miss my smeary fingerprints all over the place after I’m done reading the paper.

8)      Romance: Now with all the dating websites, half of all the people getting married say they met through an online dating website. Whatever happened to the good old days of, “My sister has a friend that’s single and just moved into the area…”? On second thought, maybe that is why the dating websites are doing so well!

9)      Job hunting: You don’t need a resume to start looking for a job – there are tons of websites for jobs and even more can be found just by typing the job you seek into a search engine. Of course, the employer can also do an extensive background search on you at the same time, checking your credit score and any other unsavory tidbits that may be lurking in your past.

10)   Civil Disobedience: No need to have Paul Revere ride through Boston to tell us the British are coming. Social Media was the backbone for the Arab spring revolutions in the last four years, and online petitions have been successful in overturning laws and inciting new legislation.

Can you think of any others that you would like to see added to the list? If so, just comment below in Stock Talk below to let us know!