When a meteoric rally in stock markets takes place, investors ingrained to invest in value could start by looking at the companies that were left out. In the one-year period, the Nasdaq QQQ (QQQ) is up around 9%. Surprisingly, the technology-heavy index underperformed the S&P 500, which rose 17.5% in the same period. The decline in Apple Inc. (NASDAQ:AAPL) shares (which is down 20% in the year) contributed to the underperformance of the tech sector.
Using a stock-screener (powered by Kapitall.com), technology companies that generated double-digit losses included the companies below:
|Company||Recent Close||1-Year Return|
|Baidu.com, Inc. (ADR) (NASDAQ:BIDU) ||$89.22||-35.00%|
|Nuance Communications Inc. (NASDAQ:NUAN)||$19.22||-26.30%|
|NVIDIA Corporation (NASDAQ:NVDA) ||$12.82||-13.70%|
The above companies all look like value plays, but under-performance is not a criteria of value. A company whose fundamentals are deteriorating regardless of the health of the economy and the markets should be avoided. Since Apple and Intel are out-of-favor, they could qualify as companies to buy. The short-term losses in Apple are just a matter of perspective. Investors who bought Apple in 2005 would be up over 10,000%.
Investors could look for companies in the midst of a product transition that is hurting profits for the short-term. These types of companies could appeal to investors with a long-term time horizon. As the product is rolled out, higher profits will be generated.
NVIDIA Corporation (NASDAQ:NVDA)
NVIDA shares are down substantially from a peak reached at the start of 2012. The company is stuck between strong margins from graphic cards sold in a chronically declining PC market.
Chart Source: Yahoo Finance
NVIDA is trying to push out Tegra 4 for mobile devices. The company even developed Project Shield. This is handheld console that Merrill Lynch said will sell for $300-$400. This is disconcerting: Nintendo Co., Ltd (ADR) (PINK:NTDOY)’s 3DS console sells for just $170, while Sony Corporation (ADR) (NYSE:SNE) PlayStation Vita sells its handheld for $249.
Project Shield could just be a reference design that is being used to show Android developers how games could be developed when powered by Tegra.
Investors with the patience to hold NVIDIA Corporation (NASDAQ:NVDA) will be rewarded if the company continues to generate strong profits from graphic cards. Tegra sales will take several quarters to mature. NVIDIA needs to sell on mass volume before profits supersede PC-based chip sales. Things are promising. The company said that ZTE will be using Tegra 4 and the i500 4G baseband processor. Shipment will begin at the end of July, 2013.
Nuance Communications Inc. (NASDAQ:NUAN)
Nuance was rising and falling steadily throughout 2012, trading between $20 and almost $26. The trend was broken when Nuance dropped in February 2013. Nuance missed quarterly earnings per share estimates. Even worse was that the company forecast multiple quarters of weak sales. Nuance Communications Inc. (NASDAQ:NUAN) blamed healthcare and emerging markets for the weak forecast.
Nuance shares rose to prominence after Apple used its technology to power Siri. Investors did not realize that the licensing deal could be of low margins for Nuance. The technology supply to Apple creates goodwill value. The worry for Nuance Communications Inc. (NASDAQ:NUAN) is its liabilities. Liabilities have been growing for the last four fiscal years.
|Other Long Term Liabilities||111.95||347.71||455.8||589.32|
Nuance is also being hurt by the PC sector. In its last quarter, weak Windows software sales hurt revenue.
Baidu.com, Inc. (ADR) (NASDAQ:BIDU)
Baidu is down 35% in the 1-year period. The company’s CEO said Baidu may make acquisitions for companies that make smartphones. This move is an attempt to diversify away from search. The move is disturbing for investors. It can be a red flag when a company looks beyond its core competency. Even though mobile growth is outpacing desktops, Baidu has a near-monopoly in China.
Last month, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) was dropped from Goldman Sach’s “Sustain China” list. Citigroup was also worried about weak mobile search results for Baidu.com, Inc. (ADR) (NASDAQ:BIDU). Citi estimated that clicks from mobile were just 1/10 that of PC levels.
NVIDIA Corporation (NASDAQ:NVDA) continues to be a value play for investors. The short-term uncertainties in the company’s strategy are a cause for concern, but NVIDIA has a solid Tegra-based solution. As mobile makers adapt the Tegra solution, NVIDIA will benefit. Nuance Communications Inc. (NASDAQ:NUAN) is showing signs of recovery on the market, and could recover if it looks for ways to strengthen its business in health care.
Baidu looks like a company that investors should avoid for now. The recent strategic shift, while necessary, is putting investors at risk. Even if the strategy were the right move, it is fraught with risk, not to mention lacking in detail. The uncertainty will continue to hurt Baidu shares.
The article 2 Buys and One to Avoid From Tech Stocks Missing Giant Rally originally appeared on Fool.com and is written by Chris Lau.
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