Successful investing is not just about picking the best stocks to buy. Avoiding underperforming companies and businesses that are on the decline can be just as important. At the Motley Fool, we are all about holding stocks for the long term; however, sometimes you just need to sell unconvincing companies and put that capital to work in opportunities with superior potential.
With this in mind, we asked three of our contributors to share with us the names of tech companies they think investors may want to consider selling, and names like Hewlett-Packard (HPQ 1.96%), Adobe Systems (ADBE +2.53%) and Dolby Laboratories (DLB 0.88%) popped up during the conversation.
Andres Cardenal -- Hewlett-Packard: The PC industry has been consistently declining over the last several years, and last quarter showed no improvement in industry data. According to data from IDC, worldwide PC shipments declined 10.8% year-over-year during the third quarter. Hewlett-Packard did better than the rest of the industry, with an estimated decline of 5.5% in shipments last quarter. However, both industrywide shipments and company-specific data are still pointing in the wrong direction.
The company is splitting in two: HP Inc. will remain focused on the consumer business, selling computers and printers, while Hewlett-Packard Enterprise will handle business infrastructure, software, and services. This sounds like a smart decision, and it could also reduce the risks for investors by shielding the company's business-oriented segment from the PC industry's decline.
As part of this restructuring, the company will also reduce Hewlett-Packard Enterprise's headcount by between 25,000 and 30,000 employees. It's important to note that layoffs can be a double-edged sword. While it's good to see that management is trying to run a tight ship, these kinds of moves can significantly damage employee morale and hurt areas such as R&D over the long term. Employees are not just an expense line on an income statement: They are perhaps the most valuable resource for a business in a dynamic and challenging industry.
I would not rush to sell Hewlett-Packard right away. However, I would seriously consider pulling the trigger if the company's plans don't work out well in the coming months.
Tim Green -- Adobe: Shares of Adobe, best known for Photoshop, Illustrator, and other creative software, have tripled over the past five years. The company has been transitioning from its traditional practice of selling perpetual software licenses to a subscription business model, and while revenue and profits temporarily took a hit, Adobe is expecting big things going forward. The company says it expects its revenue to grow by 20% annually through 2018, with non-GAAP EPS expected to grow by 30% per year. Adobe has guided for non-GAAP EPS of $2.70 in fiscal 2016, putting the non-GAAP forward P/E ratio at about 31.
To achieve this growth, Adobe will not only need to convince existing users of Creative Suite to switch to the subscription-based Creative Cloud, but will also need to expand its user base beyond existing customers. There are a lot of things that could go wrong for Adobe: Existing Creative Suite users may see no reason to upgrade, especially since Adobe's software has been fairly mature for quite some time; people currently using pirated versions of the software may balk at paying a monthly fee; assumptions about the number of new creative jobs could prove overly optimistic.
If the best case scenario plays out, shares of Adobe may not look all that expensive. But there are a lot of assumptions built into the company's optimistic outlook, and any of them could turn out to be incorrect. Another wrinkle: Adobe hands out quite a bit of stock-based compensation, which inflates its non-GAAP earnings significantly. Adobe doesn't provide guidance for GAAP earnings, but in the past twelve months, stock-based compensation accounted for about $0.67 per share. In other words, the real P/E ratio is even higher.
After a massive run up over the past five years, it may be time to sell Adobe. There's a lot of room for things to go wrong, and anything short of perfection won't be good enough.
Steve Symington -- Dolby Laboratories: Because I'm content holding each of the tech stocks in my personal, real-life portfolio, in this case, I'm exploring candidates to "sell" from my open outperform calls in Motley Fool CAPS. Of all the tech stocks I've chosen to outperform in CAPS over the years, the one that has disappointed me most is Dolby Laboratories. Shares of the audio technology specialist are down around 4% since I picked them to beat the market in mid-2012, badly lagging the S&P 500's 52% total return over the same period.
That said, a little over a year ago, Dolby stock was sitting at a fresh 52-week-high, as solid growth in its broadcast and mobile segments drove reasonably strong results relative to analysts' expectations. But thanks to what management describes as "near-term weakness in consumer markets," Dolby's top line has largely underwhelmed since then. Revenue last quarter climbed just 3.7% year over year (7.1% excluding a one-time back payment settlement) to $271.9 million, which translated to a 5.3% decline in adjusted net income to $74.9 million. For that, Dolby can thank revenue declines in all but two segments: mobile devices, which rose only slightly on a year-over-year basis to comprise around 13% of total revenue, and products and services, which saw sales jump 51% to 11.6% of revenue. But that jump was due almost entirely to Dolby's acquisition this past November of digital cinema technology company Doremi Labs. To be fair, though, while Dolby's core broadcasting segment saw revenue decline 15% to represent 42% of sales, its revenue would have risen 8% on a year-over-year basis had it not been for the aforementioned settlement. Either way, Dolby needs to see more traction in its growth initiatives to offset steep declines in its formerly large consumer electronics licensing business.
Source: Dolby
To Dolby's credit, it still generates relatively healthy cash flow, has no debt, and ended last quarter with more than $1 billion in cash and equivalents on its balance sheet. And at the very least, management seems intent on rewarding shareholders with a combination of a new $0.10 per share quarterly dividend, and around $212 million remaining under its open share repurchase authorization. With that in mind, I have no problem waiting until Dolby's quarterly report next week to get a better picture of its long-term prospects. But if that report doesn't offer a light at the end of the tunnel, I'll be ready to finally hit the mute button on Dolby stock.
