The Downgrade Created These 5 Tech Traps

Buy low and sell high -- it's every value investor's fondest fantasy. A market bloodbath like the one that started last week and culminated in a Monday Massacre hung deep-discount price tags on lots of terrific stocks. This bargain hunt was an important driver of Tuesday's tentative bounce.

But among the bargain-basement deals and steals, you'll also find stocks that are cheap for a reason. Some are stalled or stale business models, others just stopped by on their way to bankruptcy, and a few never even had any glory days.

I'm here to point out three of these mock-value stocks from the tech sector and two fast growers that have collapsed and still aren't worth your investing dollar. Put on some protective gear and follow me:

Research In Motion (Nasdaq: RIMM  )
The BlackBerry maker seems intent on being exactly that -- the corporate-class messaging expert -- forevermore. That's not a good place to be now that smartphones from companies not named RIM can do the same thing, with a hearty helping of consumer-friendly bells and whistles.

Co-CEO Mike Lazaridis reportedly dug in his heels to stop the company from joining the modern smartphone era. "BlackBerry smartphones will never have cameras because the No. 1 customer of ours is the U.S. government," he said at the time. "There will never be a BlackBerry with an MP3 player or camera." Now, of course, late-model BlackBerries come with all these features. But it's too little, too late.

Luddites shouldn't run technology businesses. RIM's ineffective management structure is under review and could use a serious upheaval, but color me surprised if Lazaridis or Jim Balsillie actually cede any of their heavy-handed control. And until they do, this stock will continue to build on the current 60% 2011 drop -- with or without external market shenanigans.

Cisco Systems (Nasdaq: CSCO  )
The networking sector is littered with ultra-cheap stocks, including longtime industry dominator Cisco. An established leader trading down by 32% year-to-date and 13% in a week? Sounds like a deal!

Indeed, many well-respected investors feel that way. Fellow Fool Jordan DiPietro is putting real money into the stock this week, for example.

I'm afraid that's exactly the wrong move. Cisco's troubles have nothing to do with sovereign credit ratings or senseless short-selling. I don't expect CEO John Chambers to actually fix the real root cause anytime soon, and it's probably too late even if he tried.

The road to Cisco's pain is paved with terrible decisions in the never-ending chase for steady growth. Amid a sea of failed consumer plays, the decision to build Cisco-branded server systems stands out as the root of all Cisco's evils.

In one fell swoop, that choice erased decades of partnership-building with other high-tech giants, Hewlett-Packard chief among them. HP went on a spending spree for billions of dollars, only to build an arsenal of networking products and steal some of Cisco's candy right back. And it's working. Cisco has turned old partners into ruthless foes; there's no way back.

LinkedIn (Nasdaq: LNKD  )
After a rip-roaring IPO in May, the professional version of Facebook saw its shares drop by more than 30%. The stock staged an impressive comeback and then dropped again. At the moment, it's off by 18% over the last week and 12% down from the IPO day's closing price.

But that doesn't mean it's cheap. LinkedIn shares are trading for more than 20 times trailing sales and 260 times forward -- e.g., the year 2012! -- earnings. In short, the company doesn't know how to make money from its impressive traffic. If this reminds you of a certain bubble from 10 years ago, I think you're spot on. Just stay away.

Nokia (NYSE: NOK  )
We're back in the mobile phone industry, where another former titan has been grasping at the smartphone era with both hands and failing to grab a clue.

Alternatives on the table included committing to the uncertain but promising MeeGo software that Nokia developed together with Intel (Nasdaq: INTC  ) , or joining the growing horde of Android makers. But no, the Finnish solution to flagging phone sales is to ditch years of in-house development and jump aboard the good-looking but, again, unproven Windows Phone platform by Microsoft. I think it's relevant that Nokia CEO Stephen Elop came straight from Redmond to take the Nokia job.

That's like leaving the house you built with your own hands, skipping right past fully decked-out mansions (some of them available for free while others are fixer-uppers), and settling in with Uncle Eddie in a van down by the river.

Could this gamble pay off? Anything is possible. But I don't see it happening. Don't buy Nokia at any price, including this 10% one-week discount or 49% year-to-date drop.

RealD (NYSE: RLD  )
Finally, consider the plight of 3-D projection specialist RealD. That technology, from RealD and others, was supposed to save the movie industry from falling attendance. Any excuse to jack up ticket prices is a good excuse, right?

But it hasn't worked out that way. Some action-packed blockbusters do well in 3-D, but dramas can't be shoehorned into the format. And if you're going to a 3-D showing anyway, why not make it a larger-than-life IMAX (Nasdaq: IMAX  ) night instead? And that's exactly what's happening.

The latest Pirates of the Caribbean movie set records at IMAX but disappointed in RealD showings, for example. That's just one example out of bucketfuls. So RealD was slammed with a 22% drop over the last week, 53% from the start of 2011, and 66% from the starry-eyed 52-week highs set in May, just before the supposed summer blockbuster season. And I don't see a triumphant comeback written in these Hollywood stars.

Got any better ideas?
Call them value traps or falling knives; these stocks can hurt you either way. But this crisis really did create some unique buying opportunities. Learn more right here:

Fool contributor Anders Bylund has written puts on Intel but holds no other position in any of the companies discussed here. The Motley Fool owns shares of Microsoft and Research In Motion. The Fool owns shares of and has bought calls on Intel. The Fool owns shares of and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Microsoft, IMAX, Cisco, and Intel, as well as creating a bull call spread position in Microsoft and a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.


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  • Report this Comment On August 11, 2011, at 11:53 AM, bbflyer wrote:

    Actually RLD as posted 4 quarters of strong EBIDTA growth since going public last year. The company is on pace to do $100MM in EBIDTA FY12 which ends in March. It is trading at 5.6x analysts expectations for CY 12 EV/EBITDA.

    The stock got hit last quarter because of a miss in top line revenue which was entirely driven by poor glasses sales overseas. Which was because consumers have to purchase the glasses separately and are therefore re-using them. Net license revenue was up 39% y/y which is almost entirely derived from per ticket license. Meaning global attendance for 3D on movies RLD screens increased 39%. The stock is dirt cheap unless you think 3D is a fad.

    But to the fad question. The data does not point to 3D being fad at all. The bears, including this author, have pointed to a decline in per movie 3D attendance this summer from a previous norm of 55-60% to this summer 40-45%. This only occurred in the U.S. and actually the %s have typically grown overseas. In addition, not all movies saw this decline. Transformers 3 did 60% in 3D domestically and 70-80% internationally (it opened in Japan last weekend at 82%).

    So why the decline in per movie 3D %? This summer saw a very crowded 3D box office with 9 major releases that went on to be #1 and #2 at the domestic box so far this year (Potter and Transformers) and 7 out of the top 10 grossing domestic movies so far. Because of this, this quarter will be the biggest quarter for RealD and 3D ever. How is that bad?

    In addition, for the first time 3 movies have broken $1 Billion in global sales this year and they are all in 3D: Pirates 4, Transformers 3, and Potter. In addition, 6 of the 10 movies ever to break $1 billion globally are in 3D and they are the last 6 to do it. Is 3D going away? I don't think so. And RealD is printing money and continuing to install screens at a blistering pace. They just announced contracts for 1,000 additional screens with AMC and 1500 additional screens for Cinemark. Which on top of their existing installs brings those circuits close to 50% 3D capacity. There total screen count is at 17,500 installs per last quarter. Not to mention they have some incredible technology for the home.

    Disclosure: I am long RLD.

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