3 Safe Ways To Invest In Technology… Despite The US Economy And Fuzzy Math
Friday, October 10, 2008: #565
by Paul Moore, Technology Specialist, Smart Profits Report
Technology and every other sector is doomed. Wait, no it isn’t. Just kidding; it is… kind-of.
CNBC is at it again.
Much like the overall stock market, “America’s Business Leader” is doing its best bi-polar impression that leaves people no closer to answers - and actually heading in the wrong direction instead.
On the one hand, the network is breathlessly creating confusion by generating even more fear about the economy and credit markets. But in the next breath, it’s busy highlighting positive data points for certain companies and constantly banging on about how the markets are oversold and we’re due for a rebound.
That sounds great if your job is to provide financial entertainment. But my job is to find ways for you to make money.
While we could get a rebound because the market is oversold, I’m becoming more convinced that we’re just as likely to have a crash before we see a meaningful rebound. By that, I mean a day where you wake up and find the Dow Industrials down 900-1,500 points in the morning session.
Heck, at its lowest point early this morning, the index was 697 points below Thursday’s close, so this scenario isn’t as far-fetched as you might think.
And there’s something that CNBC isn’t telling you…
Technology’s Fuzzy Math
Technology is unfortunately no different from every other sector out there. Between now and the time when the economic stimulus package kicks into high gear, corporate earnings are likely to be terrible.
Take IBM (NYSE: IBM) and SAP (NYSE: SAP), for example - two technology companies, where results were highlighted as being good considering the weak environment. Yet a deeper look at the numbers reveals a darker side.
SAP was the first and only large technology company to make a negative pre-announcement this quarter. On October 6, the firm announced that software and services revenue would be up 13% to 14% for the quarter on a year-over-year basis.
“Hmm… given the current environment, that’s not a bad number,” you may say.
However, buried in paragraph 3 of that same press release, the company announced that software revenue - SAP’s leading indicator - would only rise between 4% and 5%.
Unfortunately, management didn’t offer any guidance in the report so we don’t have much clarity on what the company sees for the fourth quarter. Clearly, the impact of the news hasn’t been felt yet, and with the lack of guidance, we’ll have to wait until solid numbers are offered on the earnings call in order to determine how bad the near-term situation is.
So how about IBM…?
Even Technology’s Sweetheart IBM Isn’t Quite So Darling
IBM has received praise among technology groupies and investors in general for pre-announcing a decent quarter, as earnings-per-share jumped 22% to $2.05.
The company also issued full-year guidance that indicates fourth quarter estimates are expected to be in line with the Wall Street consensus.
Like SAP, this appears to be a very clean quarter for IBM… on the surface.
Dig a little deeper into the press release, however, and we find a reason to pause.
The company also mentioned that its Free Cash Flow for the first nine months of the year was $6.4 billion and that its cash balance will be $9.8 billion. Again, these are healthy numbers on the surface, but if you make a conservative estimate about the amount IBM invested in Capital Expenditures during the third quarter, the Free Cash Flow number indicates that Cash from Operations actually dropped around 75% for the quarter.
It’s likely that the company used its balance sheet to close deals. However, the stock most likely won’t be penalized, since most sell-side analysts don’t look closely enough at the cash flow statement. After the earnings call, however, there is the potential for the stock to sell off.
3 Safer Ways To Invest In The Technology Sector
As I’ve noted in previous columns, I believe there are opportunities to buy technology stocks if you have a long-term outlook.
In the current climate, however, the best strategy to use is to buy the shares, then buy a put (known as a “married put”) as a hedge against the stock position.
You can also buy technology sector-specific ETFs, or a market index like the PowerShares QQQ Trust (Nasdaq: QQQQ), which eliminates the risk from a specific company.
As the market indexes eventually find a bottom and rebound, tech company shares - and indeed shares of other companies - will also stabilize over the next 12 months.
However, if a highly influential heavyweight company like General Motors (NYSE: GM), which plunged 33% to its lowest level since 1950 on Thursday, or Morgan Stanley (NYSE: MS) is forced into bankruptcy (despite GM defiantly stating that this won’t happen), there’s a real possibility that we could see a four-digit decline for the Dow Industrials index.
In sum, the longer-term trend is up but the path to stability may hide some sizeable potholes. That’s why it’s essential you give yourself the best chance to emerge from this mess with as few bruises as possible.
Take a look at the Xcelerated Profits Report. Our team of professional traders aims to show you how to not only stay protected, but also profit during these turbulent times, using the same investment strategies that Wall Street’s elite traders do in order to generate significant wealth. Check it out here.
Paul Moore
Related Articles at: www.smartprofitsreport.com:
The Technology Sector Could Be A Diamond In A Rough Market
The Best Sector To Invest Your Money In Until The End Of The Year
3 Steps You Can Take To Combat The Current Stock Market Collapse
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