Earlier this week, I predicted a strong year for technology stocks in 2015.
But that doesn’t mean every tech stock is going to be a winner in the New Year.
While I usually share those winners with you in this space, a big part of making money over the long haul is avoiding losers whenever possible.
Here Come the Losers
If you’ve followed along with me even briefly, you know I’m optimistic about high tech and the life sciences – and the broader stock market itself, for that matter.
Indeed, the last five years have been great for investors across the board. The bellwether Standard & Poor’s 500 Index is up more than 150% since the bull market began back in April 2009.
But now that we’re hitting new highs, it pays to become even more selective in your investment choices.
I still strongly believe that tech will outperform the broader market next year. But there will be losers along the way, of course. And losing money on even a couple of stocks can really depress your overall profits.
Not surprisingly, the three stocks I want you to avoid violate Rule No. 4 of my five-part Tech Wealth Secrets system, which says to “focus on growth.”
After all, stock prices tend to follow increases – or decreases – in earnings. All three of the stocks I want you to avoid have weak earnings growth.
Let’s take a look
Most Terrifying Tech Stocks of 2015 No. 1: SunPower Corp.
For 2015, SunPower Corp. (Nasdaq: SPWR) faces three big obstacles that make it a poor stock. Two are macro in nature, and one is company specific.
First, the GOP will control both houses of Congress next year. I doubt that Republicans will repeal federal solar tax credits, but they may not renew this incentive when it expires in 2016.
Second, the energy sector is in turmoil as oil prices continue to fall. Oil is down more than 30% since last summer and looks to remain at depressed prices through at least the first half of next year.
That’s an issue that confronts the entire solar industry. The problem is simple. Many investors are going to be reluctant to buy solar stocks when oil is so cheap, undermining support for SunPower.
And third, SunPower recently lowered guidance on sales and earnings for 2015. Bear in mind, this was roughly two weeks before OPEC said it would maintain current production, prompting another round of energy price cuts.
That follows a weak third quarter in which SunPower increased sales by a scant 1.6% and saw earnings per share fall nearly 73% to 20 cents.
SunPower does have one thing going for it. The company is considering spinning off what’s known as a “YieldCo,” a dividend-paying stock based on solar-power assets.
However, given the weak nature of solar in a low-cost energy environment, the odds are good that SunPower puts that off until at least 2016.
Most Terrifying Tech Stocks of 2015 No. 2: Samsung Electronics Co. Ltd.
Sometimes a single number speaks volumes about a troubled tech giant.
And in the case of Samsung Electronics Co. Ltd. (OTC: SSNLF) that number is 56 – the number of smartphone models the company now has on the market. Samsung recently said it would cut back models by 30% to roughly 40, but that’s still way too many to get true synergies.
No doubt, according to data compiled by IDC, Samsung still ranks as the leading global smartphone brand by shipments, with 25% of the market.
However, maintaining that lead is costing a fortune. Samsung’s net profits fell a whopping 49% in the most recent quarter. At 7%, smartphone margins are the lowest they’ve been since 2009.
And the company’s mobile division is in disarray. Just last week, dozens of mobile managers – the exact number isn’t yet known – were relieved of their posts.
Even if the company wasn’t reeling right now, I still think you should avoid it.
Plenty of foreign firms trade in the United States over the counter, as Samsung does. But most of those companies have plenty of volume and are easy to buy and sell.
Not so with Samsung. You not only have a high price, at $1,100 a share, but the stock is very thinly traded. That means you might not be able to get out in a pinch.
Most Terrifying Tech Stocks of 2015 No. 3: Groupon Inc.
Though it’s down nearly 40% so far this year, Groupon Inc. (Nasdaq: GRPN) is starting to get buzz for its low price of $7.25 and as a possible “turnaround stock.”
Moreover, the e-commerce leader in group discounts had a strong weekend between Black Friday and Cyber Monday, when sales rose 25% from the year ago-period.
But I still don’t believe Groupon has a unique enough value proposition. Or as Warren Buffett might say, it has no real “moat.”
As a pretty active online shopper, I’m inundated daily with coupons and special promotions. And as savvy online shopper, I just can’t tell the value distinction between Groupon’s deals and those from its competitors or from retailers themselves.
That’s why I’m still not impressed with Groupon’s recent performance, even though it did beat both sales and earnings estimates in the third quarter.
Sounds encouraging, until you realize Groupon has a return on equity of a negative 20%. Even worse, over the past three years, it has an earnings-per-share growth rate of negative 12%.
And remember, we often use the price/earnings to growth (PEG) ratio to look for true bargains, not just “cheap stocks.” A PEG of 1 indicates “fair value.” Anything higher means we’re paying a premium.
Groupon has a PEG of 4.94.
So, while Groupon’s recent buzz may make it sound attractive, I’d stay away at least until we know it can do well for shareholders beyond a couple of strong quarters.
All of which brings me back to Rule No. 4. Here at Strategic Tech Investor, we focus on companies with solid earnings growth, because their stocks give us the highest returns over the long haul.
The three stocks we’ve talked about today all face big questions about their long-term earnings.
But don’t be discouraged.
In the year ahead, I’ll be bringing you dozens of investment ideas that offer superior returns.
And together we’ll continue our journey on the road to financial freedom with the greatest wealth engine the world has ever known — technology.