MARKET OVERVIEW

The so-called “Santa Claus Rally” lifted the NASDAQ Composite Index slightly last week, closing at 4,150 – almost 20% below its all-time closing high of 5,048 reached in March of 2000.  To some, that suggests that the tech sector still has room to run before meaningful conversations regarding fair valuations and “frothiness” need to take place.

To us, much of the recent price behavior is very reminiscent of market conditions in place fourteen years ago just prior to the infamous “dot-bomb” crash.  Of course, no two markets are exactly the same so what’s different this time?

The difference is that this time the tech industry includes many stocks that are trading at very fair valuations, so unlike its predecessor this bubble is confined to a relatively small number of stocks that have yet to go through the painful process of recalibration.  And just how painful can that process be?

Earlier this year Apple (Nasdaq: AAPL) completed a swift fall from a high of $700 in September of last year down to a low of $390 in April of this year – a drop of 44% in just seven months.  More recently, Cisco Systems (NasdaqGS: CSCO) fell from $26 to $20, a 30% decline in only four months.  And joining the pity part this fall was Tesla (NasdaqGS: TSLA), which shot up to $193 on October 1^st only to plummet to $120 less than two months later for a 37% loss (while it is debatable to what extent Tesla can be considered a tech stock, nevertheless it does serve as a clear example of what can happen to faddish stocks at the first whiff of bad news).

The good news is that this bifurcated market provides excellent buy and sell opportunities for you to profit from.  Already re-priced stocks like Apple, Cisco and Intel (NasdaqGS: INTC) offer very good long term value, trading at P/E multiples well below the market average while also paying dividends of 2.2%, 3.1% and 3.5%, respectively.  On paper, these metrics are more suggestive of stodgy utility companies than highflying tech stocks.

Meanwhile, those stocks that have not yet been re-priced to more accurately reflect their inherent value are currently trading at P/E multiples that suggest the heady days of 1999 when talk of a “new economic paradigm” was used to justify escalating share prices.  As we have said before, we believe 2014 will be the year of “reversion to the mean” for the tech sector with equal amounts of pain and joy as both ends of the market gravitate back towards equilibrium.

As an investor, the key to making money from this expected volatility in 2014 is being able to separate the lumps of coal from the candy canes, which is what we provide for you in our recommended portfolios.

PORTFOLIO UPDATE

While the NASDAQ Composite Index was up less than 1% for the week, Twitter (Nasdaq: TWTR) gapped down more than 5% on Friday after being downgraded by a single analyst.  Also down for the week were highfliers Amazon.com (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX), and Facebook (NasdaqGS: FB), all of which are current short sell recommendations in our Equity Trades portfolio. 

We have not yet issued a recommendation of any sort on Twitter, as we wanted to wait a while to see where the stock price settled in at once most of the IPO hot money was shaken out.  However, it is worth noting that its STR (Smart Tech Rating) is a meager 0.3 which would indicate that it is still grossly overvalued.  Don’t be surprised if Twitter makes it into our Equity Trades portfolio as a short sell in early 2014.

The only one of our current short sell recommendations that gained ground last week is 3D Systems (NYSE: DDD), now trading at almost 200 times TTM earnings.  In the past month alone the stock is up 20%, and up 140% for the year as a whole.  Not bad for a company that cautioned analysts in November to expect lower profits this year than anticipated.  However, the explanation given – that the company is spending more money than anticipated in manufacturing capacity and sales to meet expected future demand for its products – was more than sufficient to placate servile investors and propel the stock even higher.  Again, very reminiscent of 1999 when many stocks were valued based on projected earnings multiples 5 – 10 years into a very murky future.

On the plus side, Investments Portfolio holding Seagate Technology (NasdaqGS: STX) is up 15% from when we first recommended it two weeks ago.  However, it is now above its buy limit of $55 so it should only be acquired on dips below that price. 

Similarly, Equity Trades Portfolio buy recommendation EMC Corp. (NYSE: EMC) is up 10% from when we recommended it two weeks ago and is now above its buy limit price of $24. 

THE PORTFOLIOS

• Portfolio updated: Thursday, December 19th, 2013 12:45PM

• Portfolio updated: Thursday, December 19th, 2013 12:46PM

LEGEND:

BiQ = Boeckl Innograton Quotient.  It is a scale from 0 – 10 that reflects the extent to which a company possesses the critical elements of innogration, and includes a score for dividend yield (0 – 3), change in operating cash flow (0 – 3), and innogration strategy (0 – 4).

STR = Smart Tech Rating.  It is the BiQ adjusted by the ratio of a company’s forward twelve months earnings per share multiple (FTM) to the same ratio for its peer group.  For example, a company with a Biq of 5.0 is trading at a FTM of 30 versus an FTM of 15 for its peer group, so its BiQ score would be reduced by 50% (15/30) for an STR of 2.5.

Stop Loss is the price at which a stop loss order should be set to protect you from excess loss in the event a stock does not behave as we anticipate.  For a long or buy position a stop loss order would be set below the current price, and for a short or sell positon a stop loss would be set above the current price.