Killer apps

Sponsored By:

Investors Must Put a DNR on These Tech Stocks – STAT!

Well, after Hewlett-Packard (NYSE:HPQ) CEO Meg Whitman stumbled through her analyst excuse-fest yesterday and begged for more patience, Wall Street has socked it right between the eyes. Shares are off almost 19% in five days, and Thursday morning we saw a host of downgrades.

Credit Suisse (NYSE:CS) slashed its price target to $15 from $25. RBC, Baird, Jefferies, JPMorgan (NYSE:JPM), Evercore, BMO, Mizuho, FBN Securities, Sterne Agee and UBS (NYSE:UBS) also issued downward price-target adjustments. And that’s just the ones I could heard of this morning before I got tired of looking around.

Let this be a lesson to investors everywhere: Tech stocks bought on turnaround hopes are like winning lottery tickets — remarkable if you find yourself in possession of a rare winner, but, for the most part, major disappointments.

So give up on HP. And while you’re at it, give up on Research In Motion (NASDAQ:RIMM) and Nokia (NYSE:NOK).

Give up these tech stocks fast, too, because the next round of ugly earnings are just around the corner.

And give them up forever.

Unique Challenge of Tech Stocks 

I understand a turnaround is no easy feat in any sector. Reformulating any business is a huge challenge. Bloated organizations tend toward inertia, and it is easier to justify or tweak poor management models than truly make the wholesale changes necessary.

But the unique challenges of a tech turnaround are characterized by crushing compression of time, and a need to be almost addicted to a creative vision of where information technology will be in one year — or better yet, three to five years.

This demands constant innovation, agile competition and a sense of urgency about being first.

A five-year plan from HP? Please. Even if it succeeds, it will have spent five years catching up to where competitors are right now.

Here’s a concrete example: Take Microsoft (NASDAQ:MSFT) and its Zune MP3 player. Even if that sad excuse for a device caught on big-time … would that have made it a personal tech king? Even with Apple (NASDAQ:AAPL)? No. It would have caught up to the iPod — which is slowly fading into obsolescence with the rise of multifunction smartphones and tablets.

It’s not enough to do what the competitors have already done. You need to do what they are about to do, too.

RIM and Nokia Are Doomed

That’s why RIMM stock is as doomed as HP. I recently panned BlackBerry maker Research In Motion, and this was my underlying theme. A lot of commenters were up in arms over the quality of the gadget … but that’s largely academic. Even if the BlackBerry 10 gets RIM up to speed with Google (NASDAQ:GOOG) Android devices and the iPhone, it has simply caught up to devices that are very old news in the tech world.

What about tablets? And what about whatever devices Apple and Google have in the works right now that will change the world in 2013 and 2014?

Nokia famously admitted this conundrum in the “burning platform memo” of early 2011. And while you might not want to invest in Nokia stock, you have to admit management was at least self-aware enough to understand the writing was on the wall, even if the seismic shift had not yet taken hold.

This is a company that was No. 1 in the world at the time in regards to mobile phone market share — and it was panicking!

That tells you everything you need to know about the sense of urgency needed at tech companies to accomplish a turnaround.

And given Nokia’s continued struggles even in the wake of this call to arms, it also should be a cautionary tale that simply acknowledging a need for change is not the same as successfully transforming a company.

Get Rich Fast, Get Poor Slowly

There’s another hangup when it comes to tech turnarounds that makes this need for urgency even harder to achieve — the power of delusion based on a big cash hoard.

If you are a company that has been on top of the tech world, you probably have a king’s ransom stashed away. RIM has $1.5 billion in cash and short-term investments. Hewlett-Packard has $9.5 billion. Nokia has $9.7 billion.

You can hang in there for a while with a big pile of cash to justify your existence … Not forever, but for a while.

Research In Motion and Nokia admittedly have a heck of a lot more pressure than HP, because they face a cash burn eroding that nest egg. But in many respects, that makes them easier to fix because there’s no patience for a vapid five-year plan like the one Meg Whitman trotted out.

HP has plenty of time, and that’s the problem. Time is one of your biggest enemies in tech.

Are They Dead Yet?

So here’s the payoff: Thanks to internal inertia and technological disruption, a number of old-guard tech stocks are as good as dead to me. Some are flat-lining as we speak, others are simply in the beginning phases of their cancer diagnosis, but all of these companies get labeled DNR in my portfolio — and in my opinion, all long-term investors should call it quits on these picks for good.

You may throw out turnaround stories of Apple and IBM (NYSE:IBM) as “proof” it can happen. But for every tech turnaround, there are 300 falls from grace that are equally compelling. So please, let’s not act like any company can do what Steve Jobs did to Apple in the 1990s. It’s the exception, not the rule for tech stocks.

This is also not to say you can’t day-trade or swing-trade for profits. There might be a very strong technical case for a short-term pop in Research In Motion, for instance. But unless you are the in-and-out type, you should label the following picks DNR, too:

Getting Their Last Rites: Research In Motion and Nokia. They will never catch up to the changes in the mobile space, are losing money and have damaged brands. If you can call Barnes & Noble (NYSE:BKS) a tech stock with its Nook reader, I would lump this one in there, too.

Diagnosed with Chronic Disease: Hewlett-Packard and Dell (NASDAQ:DELL). Maybe through constant treatment, these companies can manage to survive for a while, but the fact is life will never be the same for them thanks to a post-PC age — and if these companies don’t start acting responsibly, they could find themselves in early graves. They should just enjoy the time they have left instead of acting like they are as healthy as ever.

In Need of Constant Checkups: I am seriously considering adding Yahoo! (NASDAQ:YHOO) to my list of DNR tech stocks. Marissa Meyer pleased some investors by taking the helm, but beyond a good pedigree at Google and a media-friendly package … what is she really doing to save the company? Her so-called “turnaround strategy” read like a list of MBA clichés and digital media platitudes. The company is profitable and sitting on cash, but like HP, that doesn’t mean it’s a good investment with a good chance of reinvention.

Again, some of these picks might have short-term pops and deliver profits amid volatility for traders. And some of these tech stocks may survive for years or even decades — paying dividends along the way.

But that doesn’t mean they are good long-term investments. Anyone who has lost 60% in HP over the past five years and has been hanging on, waiting for a bottom, knows that lesson painfully well.

Who are your DNR tech stocks? Share them below.

Related Reading

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a long position in Apple.

Hey Apple users! Get The Slant podcasts delivered right to your iPhone or iPad via the iTunes Store.

Get The Slant delivered to your inbox every day!