While 2013 was a great year for most tech stocks, we believe 2014 will witness a return to more traditional levels of valuation that will be good news for some tech stocks, while bad news for others, observes Jim Pearce and Leo Boeckl in Smart Tech Investor.
In our opinion, too many tech stocks are currently priced for perfection and therefore susceptible to quick and severe correction at the first whiff of bad news. For that reason, we have selected Apple, Inc. (AAPL) as our conservative pick for 2014.
Currently priced at only 13 times forward 12-months earnings (FTM), with a 2% dividend yield, it already experienced its “bloom is off the rose” event in 2013, when its price temporarily dropped below $400, before returning to saner levels, so, most of the hot money has already been shaken out of this stock. We recommend buying AAPL below $595.
Our more aggressive tech play in 2014 is actually a short recommendation, as we believe, in the near term, there is more downside risk in the overpriced companies than there is upside potential in the fairly valued ones.
One such company is 3D Systems Corp. (DDD), which more than doubled in value during 2013. We like the company and believe that three dimensional printing will become a significant market segment in the decades to come, but at 84 times FTM, with no dividend, it is poised for a fall. We recommend shorting DDD above $80.
It doesn't take much bad news to send a faddish stock into a tailspin. For that reason, you want to own proven winners that are fairly priced, like AAPL, and sell market darlings that are priced for perfection like DDD.