Why My Investment Strategy Is Failing

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 (NYSE: RAX  ) . The stock recently set a new 52-week low amid concerns over intensifying competition.

Interestingly, IBM -- once thought to be a suitor -- may be to blame for Rackspace'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, 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 wasn't my only problem stock. A sharp decline in salesforce.com (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. 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.

Notable newsmakers
Among the other tech stocks making news last week:

  • TiVo (NASDAQ: TIVO  ) fell 19% after announcing a deal to retire outstanding litigation with Google and Cisco, among others. The $500 million payment was less than investors had expected, and it comes at a time when TiVo's own product development efforts are failing to break new ground.

  • Zynga (NASDAQ: ZNGA  ) investors suffered a 14% haircut when the company announced a plan to cut 18% of its workforce, proving that efforts to diversity beyond Facebook haven't yet taken hold. In the U.S., Zynga remains essentially an all-or-nothing bet on the continued success of the FarmVille franchise.

  • Finally, shares of Palo Alto Networks (NYSE: PANW  ) fell after the company released weaker-than-expected guidance. Management expects $0.06 a share in adjusted profits on $100 million to $106 million in revenue in the current quarter. Wall Street had been hoping for $0.07 and $113.7 million, respectively, from the cloud security specialist.

The challenge for each of these stocks, and even for established upstarts like Rackspace, is that they're fighting a handful of companies so powerful that they've come to shape our digital and technological lives. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged among the five kings of tech. Click here to keep reading.

And then, when you're done let us know what else caught your eye in the world of tech this week. Has your investment strategy changed recently? Please weigh in using the comments box below.


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