Computer Stocks Show Their Age

04/12/2013 5:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It's a long way from 1995, and most PC makers have struggled to stay relevant in a market that's going more and more mobile. But even here, there are highlights and lowlights, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

It was a terrible day for PC stocks—and it’s pretty much all Microsoft’s (MSFT) fault.

You see, Microsoft’s new Windows 8 operating system—the big redesign with a touch screen—was supposed to revive PC demand.

And it hasn’t. In fact it looks like Windows 8 has made a bad situation worse, as the redesign has driven away—or at least delayed purchasing decisions from—the corporate customers that are the remaining mainstay of PC demand.

At least that’s the conclusion from market watchers IDC and Gartner. IDC’s newest data, released Wednesday, show worldwide PC shipments falling 13.9% during the first quarter from the same period of 2012. Gartner’s numbers are only slightly less grim, with the company estimating an 11.2% drop.

It’s not just that the numbers are so bad—it’s that they are so much worse than they were supposed to be. Figuring that Windows 8 would have at least a somewhat positive effect on PC sales, IDC for example was looking at a decline at only half the rate they announced yesterday.

Stocks in the PC sector sold off heavily yesterday because everyone is pretty sure that this newest bad news isn’t reflected in most Wall Street earnings projections. Shares of Microsoft dropped 4.4%; shares of Hewlett-Packard (HPQ) fell 6.5%; and shares of Intel (INTC) retreated 2%.

Wall Street had been looking for earnings to grow by 25.5% year over year at Microsoft in the first quarter, and to drop 16.6% at Hewlett-Packard and 21% at Intel. There’s now a good chance that these companies will miss those estimates. Intel next reports on April 16; Microsoft releases results on April 18; and Hewlett-Packard speaks up on May 21.

Many investors and Wall Street analysts think that selling (or at least not buying) is the better part of valor in this situation. Goldman Sachs has downgraded Microsoft to sell from neutral; while Nomura and Hilliard Lyons marked the stock down to neutral from buy. There are clearly more shoes to drop, since Goldman Sachs is the only sell rating among analysts tracked by Bloomberg.

My concern about Microsoft and Hewlett-Packard remains today what it was yesterday. The computer market, most broadly defined, is moving away from the two companies, as consumers use smartphones and tablets for many of the functions for which they once used computers.

And—this to me is the critical point—neither company has been able to articulate a strategy to fix the problem. Microsoft has come closest, with its new version of Windows potentially serving as the operating system for PCs, tablets, and smartphones, but Microsoft has yet to gain significant market share in the tablet or smartphone markets.

Microsoft’s tablet, Surface, has sold 1.5 million units from its October 26 introduction through the end of the first quarter, market researchers estimate. That’s far less than the 2 million units that some analysts were projecting for the fourth quarter of 2012 alone.

Before this PC data, I didn’t see any reason to buy Microsoft or Hewlett-Packard. After the PC numbers, I don’t see any reason to buy Microsoft or Hewlett-Packard.

Intel took a much smaller hit from the news because the company has announced a series of strategies intended to grow market share in the smartphone and tablet markets, and to grow other businesses in order to replace PC revenue. Plus, the stock has a 4.2% yield, and that covers a quantity of blemishes.

The jury is out on the effectiveness of those strategies, but at least investors know what the company plans and can judge for themselves. I’d be surprised if Intel’s shares didn’t take another hit when the company reports first-quarter earnings on April 16. I’d especially look for disappointing guidance for the rest of the year to drive down the share price.

I’d use that weakness as a buying opportunity, since I’m convinced that the company’s strategy will work. (For my discussion of that strategy, see my post.) Intel is a member of my Dividend Income portfolio.

I know that many of you disagree. Your call.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio here.

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