3 Tech Stocks to Sell in 2009

Yesterday, I asked which tech stocks you should buy. Today, it's time to look at the likely losers, the stocks that could burn you.

Learn from the miser
Of all the things I've done as an investor, my smartest-ever move might have been to send an email to It's Earnings That Count author Hewitt Heiserman Jr. in September of 2004. My modest request for an interview back then led us to create a screen that's crushed the market every year we've run it.

The centerpieces of this "Scrooge" screen, as we'll call it, are reasonable valuation, sustainable growth and earnings, good capital management, low institutional ownership, and balance sheet strength. It's that last point that matters most for today's column.

"I think one of the great lessons of the late '90s is that investors forgot about [debt] and the rest of the balance sheet," Heiserman said during our 2004 interview. Four years later, they forgot again.

Dozens of firms that abused leverage are no more; Lehman Brothers is only the most visible. Investors have also been stung. Too many bought on margin and were forced to sell at precisely the wrong time. Chesapeake Energy's Aubrey McClendon could be the poster child for this particular brand of excess.

And he's got plenty of company. Even firms that have used debt responsibly are in trouble. General Electric (NYSE: GE  ) begged Warren Buffett for a bailout and got one, on usurious terms. Goldman Sachs (NYSE: GS  ) , too.

Tech firms usually know better. Certainly Intel (Nasdaq: INTC  ) does. In a summertime interview, Chief Financial Officer Stacy Smith said that, at the behest of co-founder Gordon Moore, the chip maker routinely keeps one to two years' worth of emergency research funding in the bank.

Most firms aren't that conservative. But were you to add up all the cash on the balance sheets of Silicon Valley's best, I bet you'd have enough to fund a good portion of President-elect Obama's proposed stimulus plan. General Motors says it needs a handout? Go see Steve Jobs -- he's got about $25 billion in the bank.

Take out the tech trash
Not that Apple (Nasdaq: AAPL  ) would likely have anything to do with GM about now. Tech's titans -- Jobs included -- are far more interested in shopping for bargains in their backyard. They've the cash to do so. They're the firms that our Scrooge screen would love if they were just a tad cheaper.

And what might Scrooge loathe? The balance sheet busts, of course. Where our tech buys are flush with capital born of massive free cash flows, two of our sells are deeply in debt and a third is trending badly. I'm sure you're familiar with them.

Advanced Micro Devices (NYSE: AMD  ) is an innovator and the only real threat to Intel as a PC and server chip supplier. But its balance sheet shows $3.9 billion more debt than cash, a deficit that could grow wider soon. A revised restructuring plan will cut 600 jobs and result in $45 million in cash expenditures in fiscal 2009, says a recent 8-K filing with the SEC. Not good.

As one of the emerging heavies in Web content delivery, Level 3 Communications (Nasdaq: LVLT  ) is both relevant and reasonably well positioned. But so is AMD. And like AMD, Level 3 is buried in debt. Enough that it made Foolish colleague Morgan Housel's list of firms that could die next year. Too dire a verdict? Probably, but it can't help that employees rate it as one of the 50 worst places to work.

I hate adding Sun Microsystems (Nasdaq: JAVA  ) to this list. The stock could be a screaming value, after all. I'm also a fan and former employee. I have friends who still work there. However, Sun's capital position seems to worsen with every passing quarter. And now, CIOs say their top 2009 priority is server consolidation, which means they're angling to unplug the Sun gear they've bought in years past. Ouch.

But those are my three ideas. What about yours? Would you sell any of these stocks? Would you buy? Insert your comments below and may yours be a very Happy, and very Foolish, New Year.

Apple is a Stock Advisor selection. Chesapeake Energy and Intel are Inside Value picks. The Fool owns shares and covered calls of Intel. Try either of these Foolish services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers is a member of the Rule Breakers team and had stock and options positions in Apple at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is tech-tastic.


Read/Post Comments (6) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 01, 2009, at 8:47 PM, gwhitebeard wrote:

    Fool, These are DISASTEROUS recommendations in this still uncertain economic environment! The BEST and Safest place to trade and be positioned is in LARGE CAP Dividend Paying Large Volume S&P companies! THe companies that you recommended are subject to credit / consumer whims and / or tightening business cycles! Amazingly BAD advice.

  • Report this Comment On January 02, 2009, at 7:58 AM, TMFMileHigh wrote:

    'Morning gwhitebeard. Thanks for commenting. I wonder, though -- did you read the title? These are three stocks to *sell*.

    FWIW and Foolish best,

    Tim (TMFMileHigh)

  • Report this Comment On January 05, 2009, at 4:41 PM, ahaydu wrote:

    Why sell Level 3 now? It's 83 CENTS, where's it going? If you bought higher you can sell IF it goes under and take the tax loss. The upside has a lot of room versus the down side.

    I wouldn't be Buying (unless you love to gamble) but it's definately a HOLD rather than a Sell.

    My 2 cents....

  • Report this Comment On January 06, 2009, at 11:19 AM, GanznSchmuck wrote:

    Tim,

    I think you give a very poor argument to sell LVLT. I much rather purchase a company with a strong balance sheet, but I certainly dont think that simply because a company is full of debt one should sell (look at COP, for example).

    Giving a recommendation to sell based solely on whether a company is full of debt is as dangerous as recommending a buy simply because it is full of cash.

    I think you can do a lot better than that...

    Regards,

    Arie

  • Report this Comment On January 07, 2009, at 2:14 PM, itsallhype95 wrote:

    Tim,

    I worked for people involved in Level 3 and they will make this work. They handle a balance sheet very well. They will keep attacking the debt until it is a non issue while continuing to grow high margin revenues. They will get this stock well over the 83 cents its trading for.

  • Report this Comment On January 08, 2009, at 2:19 PM, GanznSchmuck wrote:

    So, Tim, any thoughts about LVLT's recent 80% INCREASE?!?!?!?!?!

    I am not claiming it will go up or down at this point. What I am claiming is that your reasoning for selling was very poorly based.

    No thoughts?

    Regards,

    Arie

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