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Rackspace Hosting, Inc. (RAX), TiVo Inc. (TIVO): Why My Investment Strategy Is Failing

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Each week, I endeavor to report the results of the Big Idea Portfolio, a collection of five tech stocks that I believe will crush the market over a three-year period. I’ve done it before; my last tussle with Mr. Market ended with my beating the index’s average return by 13.35%.

Real money was on the line then as it is now, which means any one of the five stocks you see below could ruin my investment strategy. None has fit that description more in recent weeks than Rackspace Hosting, Inc. (NYSE:RAX). The stock recently set a new 52-week low amid concerns over intensifying competition.

Rackspace Hosting, Inc. (NYSE:RAX)

Interestingly, International Business Machines Corp. (NYSE:IBM)— once thought to be a suitor — may be to blame for Rackspace Hosting, Inc. (NYSE:RAX) ‘s most recent troubles. Big Blue last week announced a deal for privately held SoftLayer Technologies worth a reported $2 billion in consideration. The company’s 13 data centers stretch across three continents and serve more than 21,000 customers.

In a press release, International Business Machines Corp. (NYSE:IBM) said it would combine SoftLayer’s business with its SmartCloud group to create a new Cloud Services division whose aim is to supply the infrastructure for services born on and delivered through the Internet. Big Blue sees the group producing $7 billion in annual revenue by 2015.

What’s the Big Idea this week?
Rackspace Hosting, Inc. (NYSE:RAX) wasn’t my only problem stock. A sharp decline in salesforce.com, inc. (NYSE:CRM) has also hurt my investment strategy. The stock is down more than 14 percentage points since my last update, mostly because of fears that the company overpaid in bidding $2.5 billion for digital marketing firm ExactTarget Inc (NYSE:ET). The Big Idea portfolio surrendered another 342 basis points to Mr. Market in our three-year contest to see who can do better for investors.

All four indexes gained. The Dow led the way with a 0.88% jump, followed closely by the S&P 500’s 0.78% gain, the Nasdaq’s 0.39% bump, and the Russell 2000’s 0.35% improvement, according to data supplied by The Wall Street Journal. Here’s a closer look at where I stood through Friday’s close:

Company Starting Price* Recent Price Total Return
Apple $413.52** $441.81 6.8%
Google $650.09 $879.73 35.3%
Rackspace Hosting $41.65 $35.52 (14.7%)
Riverbed Technology $25.95 $16.01 (38.3%)
Salesforce $25.26** $39.61 56.8%
AVERAGE RETURN 9.18%
S&P 500 SPDR $124.39** $164.80 32.49%
DIFFERENCE (23.31%)

Source: Yahoo! Finance.
* Tracking began at market close on Jan. 6, 2012.
** Adjusted for dividends, splits, and other returns of capital.

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