For investors looking to trade a bottom in tech stocks, Cramer suggested studying the last time that sector reached a trough, in 2003.
Before any discussion of a tech bottom, though, Cramer pointed out one important fact: In 2001, people across the market were saying it was too late to sell the sector. But a quick glance at the charts of Cisco, Intel, Microsoft and Oracle show that there were another two years of declines that could have been avoided if investors had cashed out of these stocks. So don’t think, even after the precipitous drops we’ve seen lately, that more downside is out of the realm of possibility.
The key here is to find out what factors brought about that 2003 bottom. Cramer pinpointed four: drastic enough analyst estimate cuts that companies could beat their quarterly numbers, decreased inventory, an improved economy and big cash holdings.
The estimate cuts are self-explanatory. Tech companies needed the bar lowered so that their earnings could beat those numbers. So far in this market only Yahoo!’s estimates have been cut – no one else. So that criterion hasn’t been met.
As for decreased inventories, we don’t have that yet either. It’s more a hardware than software problem, Cramer said, but these companies’ warehouses are full. Just today the drive company Western Digital announced its own inventories were overflowing. Until that supply is worked off, no bottom.
Back in 2003, these companies also proved they were much more cyclical than originally thought. That’s why prices were so inflated at the top and the stocks themselves could drop so sharply. From peak to trough, Intel plummeted 83%, Cisco 90%, Yahoo! 97%, Microsoft 66% and Oracle 84%. Given the cyclicality of these names, we need to see an improved economy before they can rally again. And since we’re still grappling with the idea of entering a recession – rather than working ourselves out of one – that rally won’t be happening any time soon.
It’s true that Intel, Cisco and Microsoft are sitting on piles of cash. But we don’t want ATMs, Cramer said, we want growth. And so much of that money went toward stock buybacks that never brought the intended result: rejuvenating the share price.
So a tech bottom for the foreseeable future is out, Cramer said, barring one exception. Companies with new products like Research in Motion’s BlackBerry or Apple’s iPhone or iTunes could survive this market, maybe even post a gain. But Cramer said he doesn’t see anything like that on the horizon.
Cramer’s advice for tech lovers? Consider selling some of your holdings on any strength. And given the fundamentals he just laid out, now is definitely not the right time to buy.
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