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Tech stocks may be suffering from consumer gadget fatigue

On Thursday, Apple hits its lowest-level since 2014. The stock market darling has shed 32 percent of its value since a February 2015 high. What's behind the dramatic decline? Fatigue of a particular kind.

I have a new label for what I see as a potentially devastating new consumer trend: gadget fatigue. As consumers, we have gadgets that are handhelds (smartphones/tablets), for the wrist, chest (heart monitors), head (GoPro), and even for the eyes (remember Google Glass? Virtual reality is supposed to be next.) Could it be that we are at the limit of both our desire and capacity to adapt these products to our lifestyles?

I'm thinking the answer is yes.

Man yawning while looking at smart phone
Getty Images

If we, as a group, wanted more gadgets, we would simply buy more. After all, this isn't just about price; there are various price options in each category that run the gamut from high to low. Plus, with low gasoline prices, weren't consumers supposed to get a nice bump up in spending power? From my vantage point, we just are not compelled enough to spend more money to put more gadgets somewhere on our bodies.

Even the ultimate gadgets, iPhone and Android-based phones, offer so many apps, that they render most any other gadgets redundant.

This is my personal point of view and my evidence is anecdotal, but what about the recent investor disappointments in the most recent quarterly results and/or forecasts from Apple, Fitbit, and GoPro: All three companies saw their shares take a hit after they announced their most recent quarterly results. Yes, these companies are different in many ways. But in the simplest of definitions, they sell gadgets and all three are seeing some form of pricing pressure.

"From my vantage point, we just are not compelled enough to spend more money to put more gadgets somewhere on our bodies." -Mitch Goldberg, president of ClientFirst Strategy

Apple recently lowered the price of the Apple Watch. Apple lowering prices? Yeah, enough said. In fact, even though Apple sold an estimated 12 million Apple watches, and even though that's more units than the iPhone sold in its first year, investors were nonetheless disappointed since the company that now has such a massive user base for its other products.

What about iPad sales? Steadily declining for quite some time despite the introduction of more powerful iterations. Heck, even Amazon decided to kill off its smartphone offering and its latest gadget which has drawn rave reviews and notable sales, Echo, is designed to just sit in your home rather than be taken with you everywhere you go.

On Thursday, Apple announced a $1 billion investment in the "gadget" that is arguably the most interesting, though most theoretical, in the world: a car that takes its lead from Silicon Valley technology.

There are five big picture elements of gadget fatigue at play and they all seem to be playing out at the same time:

  1. The consumer is financially petered out. Take The Gap, Macy's, Kohl's, Nordstrom and other retailers. Low gasoline prices didn't help the retail sector. Their earnings and stock prices are plunging. Macy's and Nordstroms went over a cliff this week after earnings reports. I feel like the whole world changed after Apple's last quarterly report. Macy's reinforced it.
  2. S&P 500 corporate earnings peaked in 2014.
  3. The major stock market averages, as of current charts, are making lower highs and lower lows. Putting on my technician's hat on, this is a negative.
  4. Tech disruption is happening at a breathtaking pace. That is obvious, but companies in virtually every sector are finding that they no longer have a place in the economy. Amazon is accelerating disruption way quicker than the rest of the retail sector can keep pace with.
  5. Tech companies have a history of disrupting themselves. Remember 2000 and the tech wreck? Dell, Hewlett Packard, and Lucent were powerhouse tech companies that were widely held by investors. The promise of the internet came true. In fact, it exceeded expectations beyond anyone's wildest predication. But the big winners of that time are far and few between, Priceline and Amazon to name two. Google and Facebook went public after the tech wreck.

Here are a few gadget fatigue takeaways:

  1. Technology-based gadgets span two sectors of the economy; technology and consumer discretion. These two sectors have potential to offer rocket ship rides higher and unfortunately, they could burn up upon re-entry.
  2. Market saturation is a major limiting factor. Constantly pleasing consumers with new iterations of the same product is tough.
  3. No matter how much one believes in a company that they adore, the facts are this: From one-year highs, GoPro is off about 85 percent, Fitbit is off about 78 percent, and Apple is off 32 percent.
  4. You really don't know in advance if a tech or consumer discretionary company can keep pressing the new invention button. And once each new category of gadgets runs past its first few iterations of innovation, time and again the growth of the category slows after the products reach mass market appeal. For some products, the mass market is huge and for others, it is small.
  5. No matter the hype and the joy a company's products bring to consumers, consumers have a very reliable track record of jumping ship.
  6. Technology and consumer discretionary stocks aren't about valuation as much as momentum when things are going well. New hot products equate to more capital gains. Period. When that stops, investors start to bail and at that point, that's where you start to hear about valuation. But that is not cause and effect; it is more like cause and "fill in the blank" as to why a reversal took place.
  7. "Gadget fatigue" is as good a "fill in the blank" as any right now.

What investors can do to beat fatigue

Here are a few suggestions:

  1. Read up on the company's news and product development. Once stocks in these sectors take a hit, many do not recover.
  2. If a company in these sectors does have a big hit on their hands (I may get some hate comments for this) buy the stock if you think the product is a good one. You can add below the market buy-limit orders to buy more on dips. Once these get hot, they tend to stay hot for a long time.
  3. Use a selling rule! Let's say the stock rises by 20 percent. Take off 20 percent of your position. I think it is a mistake when investors try to squeeze out ever penny of profit that they think they can get. You won't know the bottom or top in advance, but you could manage your portfolio like a business. It is always important to think about taking profits on the way up.
  4. No matter how good the future looks for these sectors, tech and consumer discretionary, please diversify!

I hate to come from a negative angle, but the negatives, or mistakes, make for good lessons. The lesson here is simply an old one that bears repeating. When it comes to investing, nothing lasts forever. Consumer acceptance happens quicker than ever and so will disruption.

By Mitch Goldberg, president of ClientFirst Strategy

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