x Abu Dhabi, UAESunday 23 July 2017

Timing is all when it comes to technology stocks

Even smart investors can get it wrong in the fast-evolving technology sector, where the hottest global names can quickly become old news.

Institutional investors have opposing views on the fate of the Silicon Valley giant Hewlett-Packard and other tech giants. Marcus Brandt / EPA
Institutional investors have opposing views on the fate of the Silicon Valley giant Hewlett-Packard and other tech giants. Marcus Brandt / EPA

When Hewlett-Packard agreed to buy the British software company Autonomy in August last year for US$11.1 billion (Dh40.77bn), two well-known investors made diametrically different bets on how the big deal would play out.

To short-seller Jim Chanos, who had been raising red flags on Autonomy for years and had started shorting shares of HP last year, the deal was another nail in the coffin of the Silicon Valley tech giant, according to a source familiar with his thinking.

But to activist investor Ralph Whitworth, the co-founder of Relational Investors, it was time to commit to HP and the turnaround story the company was trying to sell to Wall Street. His fund bought more than 17.5 million HP shares after the deal was announced, and Mr Whitworth received a seat on the company's board. This year, Relational roughly doubled its stake in HP.

In the wake of HP's decision to take an $8.8bn writedown on the deal because of alleged accounting irregularities at Autonomy, it appears Mr Chanos - whose call to short Enron before the energy company collapsed in a corporate scandal may be his most famous trade - was more astute.

HP's shares are down 36 per cent since Relational, which declined to comment, built its stake in the third quarter of last year.

Relational's big move into HP is a reminder that even smart investors can get things wrong in the fast-evolving technology sector, where once hot global names like Research in Motion and Yahoo can quickly become yesterday's news.

It is a world where a company may effectively erect barriers to entry in a market only to have them torn down by a rival with a new whizz-bang product - just as Apple's iPhone broke the dominance that Research in Motion's BlackBerry had enjoyed.

One warning sign that a tech company may be on the verge of losing its edge is when it makes acquisitions outside of its main area of expertise to move into new product lines. Savvy tech investors also say be wary of companies that experience a succession of management changes.

The pace of change in the technology sector is much faster than in other industries, said Kaushik Roy, an analyst at Hercules Technology Growth Capital. "It attracts new talent and capital, many start-ups are formed, which can be extremely disruptive to incumbents," Mr Roy said. "In other words, yesterday's winners can rapidly become today's losers and vice versa."

In the case of HP, the company not only has had four chief executives since 1999, it has been striving to find another niche to dominate as demand for one of its core products - computer printers - wanes and as its PC business stumbles.

Or consider online search pioneer Yahoo, which has gone through six chief executives and is struggling to keep pace with Google. Josh Spencer, a portfolio manager at T Rowe Price, said frequent turnover in the executive suite at Yahoo was a warning sign to him. Mr Spencer said he does not own Yahoo shares and has not in the recent past.

While a company may view an acquisition as a fresh start - that is what HP was trying to say about Autonomy - some investors see it as a warning that the core business is struggling.

Mr Spencer noted that the technology industry's most successful companies - Apple and Samsung - generally have not made acquisitions and instead developed new products internally.

For Margaret Patel, the managing director at Wells Capital Management, one of the first red flags she saw at HP was when the former chief executive Carly Fiorina bought Compaq for about $25bn in 2002.

"I felt then that the acquisition was too large and expensive, and personal computers were not their core strength," said Ms Patel, who has since avoided investing in HP.

Of course, timing can be everything even if an investor is eventually proven right. Ms Patel missed out on a 137 per cent gain in HP's stock price from the time of the Compaq deal up until the end of 2010.

A few money managers see a flashing yellow light in the big sell-off of Apple shares in the past few months.

Apple, the most valuable US company, has shed nearly 30 per cent of its value in the past three months.

Since the death of its co-founder Steve Jobs the DoubleLine co-founder Jeffrey Gundlach has been recommending that investors short the company's shares because "the product innovator isn't there anymore".

Mr Gundlach said he began shorting Apple's stock at about $610 and maintains that it could drop to $425. He declined to comment on Tim Cook, who succeeded Mr Jobs more than a year ago and is seen by many as less visionary.

Christian Bertelsen, the chief investment officer at Global Financial Private Capital, with assets under management of $1.7bn, said his firm began paring back its exposure to Apple this fall because he felt the expectations for the company's new iPhone 5 had got overheated.

He said his firm dramatically took down its exposure to Apple shares when the stock hit $670 a share. "For us, the light bulb went off this fall," he said. Mind you, Apple's shares still remain up about 25 per cent for the whole year.

And then there's Research In Motion. Once a leader in smartphones, it is now in danger of becoming irrelevant.

"They saw the move towards all touch-screen phones and didn't move with it," said Stuart Jeffrey, an analyst at Nomura Securities.

"The end of the road is a long, lonely journey," said Robert Stimpson, a portfolio manager at Oak Associates Funds whose fund does not own any shares of Research In Motion. "I think they will fight the good fight for many years, probably unsuccessfully."

* Reuters