At Equities we have previously spotlighted tech companies (both large cap and micro) we felt had strong fundamentals. We felt it would be interesting to this time, instead of looking for companies that have strong growth potential, look for tech stocks that are the exact opposite. That is, ones that don't meet any of the criteria we feel is necessary for a solid tech company.
To find these weaker investment opportunities, we took the formula we used to find tech companies that are a solid investment, and then simply inversed that fromula. By doing this we were able to devise a series of "red flags" for tech company stocks:
Red Flag #1: The company pays a dividend.
A tech company should be reinvesting profits, not divvying them out to investors. Tech is driven by innovation, and innovation is driven by reinvestment.
Red Flag # 2: The company has a debt-to-equity ratio that is higher than .50.
Generally long term debt for a technology company isn't a good thing as companies that fund themselves primarily with equity are more stable.
Red Flag #3: The company has a gross margin lower than 50 percent.
Margins are extremely important for a technology company, the gross margin especially because it shows the profit after just the development costs. Tech companies rely on their product, and if the gross margin isn't right, the company is probably doomed.
Red Flag #4: The company has a profit margin lower than 10 percent.
A tech company that doesn’t have a profit margin higher than ten percent still has a chance of success. But a company that does have a ratio that high (or higher) has likely stabilized, and is thus a safer investment.
Red Flag #5: The company has an analyst consensus of "hold," or worse.
Just to be sure, it does't hurt to make sure analyst consensus is on your side.
We found six tech companies worth at least $2 billion (that is, mid-cap or larger) that carry all five red flags. Actually, we found seven, but one of the companies – Dell Inc. (DELL) – is about to be taken private and as such is a moot investment.
After excluding Dell, here are the six mid-cap (or larger) tech companies on the market that investors should be wary of. While many of these companies have long histories, and in some cases have even had much success over the years (maybe even much success this year) we feel they lack the fundamentals to be considered strong tech stocks long-term:
Broadridge Financial Solutions Inc. (BR)
This company was spun off of Automatic Data Processing in 2007, and provides services like securities processing for large companies. Their primary revenue driver is electronic proxy voting.
Broadridge is up 35.96 percent on the year to hit $30.66 a share.
Computer Sciences Corporation (CSC)
This Falls Church, Va.-headquartered IT company has been in business since 1959. Their CEO Mike Lawrie is currently on the short list to replace Steve Ballmer as the CEO of Microsoft Corporation (MSFT) .
CSC is up 30.52 percent on the year to hit $51.62 a share.
Emerson Electric Co. (EMR)
This Ferguson-Mo.-headquartered company manufactures power equipment. They've been in business since 1890, and are one of the largest corporations based out of Missouri. Among hundreds of electronic products, they're perhaps most famous for being the first company to mass-market the Weed Whacker.
Emerson is up 23.44 percent on the year to hit $64.04 a share.
Hewlett-Packard Company (HPQ)
Once one of the most dominating tech companies on the planet, Hewlett Packard has fallen on hard times the last several years, with two successive CEOs greatly damaging the company's reputation. The company was recently dropped from the Dow, and is scrambling to trn things around in the midst of declining profits.
HP is up 57.76 percent on the year to hit $22.07 a share.
Harris Corp. (HRS)
Harris provides telecom equipment for government agencies, in both the US and Canada. In 2011 Harris opened a major avionics operation in Calgary to work on a major weapon support-system project for the Canadian government.
Harris is up 20.99 percent on the year to hit $57.93 a share.
SAIC, Inc. (SAI)
Like Harris, SAIC works closely with the government, specifcally the Department of Defense and the NSA., providing IT solutions. SAIC are the ninth largest defense contractor in the US.
SAIC is up 49.90 percent on the year to hit $15.41 a share.
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