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Is Now the Time to Buy These 3 Beaten Down Stocks of the Dow Jones Industrial Average?

By James Brumley – Nov 2, 2020 at 8:15AM

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It's no coincidence these names all rode the same growth wave in the past, and are now struggling to adapt to the marketplace of the present.

Stocks may have started October on a bullish foot, but they certainly didn't end the month on one. Following September's 2.3% tumble, the Dow Jones Industrial Average accelerated its sell-off to lose 4.3% the following month. Unfortunately, it's looking like there's room for more downside.

Leading the Dow's bearish charge? That's Cisco (CSCO 0.35%), Intel (INTC -6.41%), and International Business Machines (IBM -0.04%), better known as IBM. These stocks logged losses in October of 8.9%, 13.5%, and 11.8%, respectively.

There's a clear common element to these particular laggards -- they're all technology stocks. That's why it would be easy to chalk up this weakness to sector-related softness rather than anything company-specific. Indeed, given the unusually low valuations (past and projected) these three stocks sport right now, it might be tempting to step into any or all of them following this dip.

Metallic dice with "buy" and "sell" faces up, lying on a stock chart.

Image source: Getty Images.

But that line of thinking may oversimplify what's ultimately wrong with each of these big, old tech names. The more important commonality right now may be that each of these technology stalwarts remains stuck in the past.

Time only works against market leaders

It's certainly not the first time an industry's titans have struggled to adapt. Cable television giants like Comcast and Charter have been unable to quell the cord-cutting made possible by streaming alternatives such as Netflix (though to its credit, Comcast is getting traction with its young streaming service Peacock). Cameras and printed photographs were displaced by smartphones and social media. Newspapers are struggling to survive in the era of the internet.

Obviously, corporations and consumers alike are still buying and using tech. Technology market research outfit Gartner estimates that global IT spending will grow 4% next year, mostly offsetting this year's COVID-impacted decline of 5.4%.

More and more of this demand for hardware, however, is being aimed at smaller companies offering superior solutions. One only has to look at the computer processor war being fought between Intel and rival Advanced Micro Devices (AMD 0.32%) to see this in action.

Beginning in 2006, Intel's central processing unit (CPU) business began to soar at AMD's expense. By 2016, Intel had sold more than 80% of CPUs being bought worldwide, according to data from Passmark. Rival AMD has been working on next-generation processors for years, though, which would allow it to offer the same level of computing power at a much lower cost. As of this year, Intel's share of the CPU market has been whittled down to a little more than 60%, while AMD's has improved from 2016's low near 18% to its current level of 36%.

As for the reasons Intel has lost some of its competitive edge, clearly its 7-nanometer chip missteps are a factor. In a bigger, more philosophical sense, however, Intel arguably became complacent and presumed its dominating market presence from the late 90s was cemented in place. It should have been thinking more like a start-up.

IBM's demise is rooted in a similar mistake. That is, the company acted as if its place as a leader of the PC and mainframe market in the 1990s and early 2000s would allow it to remain a leader through any marketplace changes or technology evolutions. IBM was late to the proverbial party, though, only formalizing its work in "strategic imperatives" markets like cloud computing, cybersecurity, mobile, and social media in 2015. But by then it was too late. Except for a brief reprieve in 2018, IBM's top line has been shrinking since 2012.

As for Cisco, it's still arguably the most recognizable name in networking after its rise to prominence in the '90s. It's hardly the only one, though, and it's not winning deals the way it used to. Telefonica Spain and South Korea's Airport Railroad Express both tapped Juniper Networks (JNPR -0.96%) to tackle big networking projects this year, while Telefonica U.K. and Windstream chose Ciena (CIEN -0.08%) hardware for similarly big needs. These are contracts that in the past may have been given to Cisco almost by default. Time and new intellectual property have allowed new competitors to chip away at Cisco's once-commanding lead.

Look for younger, nimbler names

None of this is to suggest the sizable sell-offs IBM, Intel, and Cisco suffered in October are solely due to years' worth of built-up complacency or the corporate headaches associated with size and age. It's also not to say these names can't reinvent themselves in a way that improves their prospects. IBM is doing just that, in fact, announcing in October it plans to shed its managed infrastructure business to focus on the hybrid cloud market. Intel plans to acquire SigOpt to improve its artificial intelligence offerings. Cisco is (still) seeking to acquire Acacia Communications (ACIA) in a bid to bolster its high-speed optical interconnectivity menu.

However, these Dow Jones Industrial Average technology names saw their strongest growth in an environment that's changed dramatically in the meantime, leaving them more vulnerable than others now.

Sure, most of IBM, Intel, and Cisco's product lines have shrugged off the "legacy" description, but pieces of each company's structure, ethos, and mindset may still be stuck in a past that doesn't work in the present. Until these holistic challenges are seriously and fully addressed there are better investment opportunities out there.

Of course, that's true for a lot of stocks in other industries too.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Comcast, Gartner, and Intel. The Motley Fool has a disclosure policy.

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