Have you bought a personal computer lately? Probably not, and
neither have your friends. Technology research consultancy Gartner
Group just released a report showing an 8.3% year-over-year drop in
global PC sales in September, the worst annualized drop in recent
And things are likely to get even worse in coming quarters.
At least that's the view of short sellers that are increasingly
targeting this sector. If these short sellers are right, then a
major industry shakeout may be coming. And if you're a value
investor, then you need to watch how this trend plays out, because
some of these very same stocks could turn out to be the top
bargains of 2013.
Windows to the rescue?
In recent weeks and months, tech watchers have been suggesting
that slowing PC sales are the result of a decision to wait for
Microsoft's new version of Windows, known as Windows 8, and set for
release on Oct. 26. In fact, thebeta testers for this software have
delivered positive reviews, reporting that
has finally delivered an operating system with the look and feel of
the best operating systems offered by
There's just only one problem: Consumers and businesses no
longer need to upgrade their computers every two or three years, as
today's security software does a much better job of keeping these
machines from getting bogged down with viruses and malware. It's
why short sellers figure there won't be much of an upgrade cycle
this fall and winter, and expectshares of Microsoft and other
companies to feel the heat.
Howbearish are they? They boosted their short position in
Microsoft a whopping 19% in just the two weeks ended Sept. 28. The
102-million-share short position is now the fourth-highest of all
Nasdaq stocks, right behind
Sirius XM (Nasdaq:
Frontier Communications (Nasdaq:
That's right, Intel, the world's largest chip maker, touched
52-week lows in recent sessions. The old adage still applies: As
goes Windows, so goes Intel, which has thus far largely missed out
on the tablet-computing revolution. The chip maker can ride out
this storm, however, as it carries more than $7 billion in net cash
on its books.
[In fact, StreetAuthority analysts are saying right now is a
great opportunity to buy Intel.
See this article
The same can't be said for rival
, which has only $1.2 billion in cash against $2 billion in debt.
This may explain why the short position in AMD, rose from 121
million shares to 142 million in just two weeks. AMD is in the
crosshairs of short sellers even though it is already treading
water around its52-week low .
Another stock seeing a double-digit jump in the short position
in two weeks:
, the world's largest seller of PCs, which has also been testing
52-week lows in recent sessions. The fact that short sellers are
making big bets on these stocks -- even after many of them are near
52-week lows tells you that they expect things to get a lot worse
before they get better.
The 2013 reversal
Yet here's why you need to monitor this situation closely. If short
sellers are right, then the industry dynamics will be inexorably
altered, creating clear long-term winners among the survivors. For
example, if AMD's woes deepen and the company generates losses in
coming quarters rather than the expected small profits -- which is
more likely to happen -- then the company's research and
development budgets would need to be slashed. It would then become
ever harder for AMD to keep up with industry leader Intel. This
means Intel may be looking at a smallermarket share in 2013 and
2014, but can capture a bigger slice of that pie once AMD proves to
be a weakened rival.
In a similar vein, box makers such as
, Hewlett-Packard, Acer and others are probably questioning their
long-term commitment to this industry, which carried
razor-thinprofit margins during the good years, and perhaps flat to
negative margins during a falling sales environment. Here again, if
any major player decides to reduce its role in the PCmarket
sharply, then the other players would be able pick up market share
and rebuild scale economies in manufacturing and distribution.
In fact, even as short sellers are likely to keep the pressure
on this industry in the near-term, it's not yet fully clear that
you should count out the industry for the long-term. Credit Suisse,
for example, says that PC sales will rebound roughly 5% in 2013. It
says many big buyers have been waiting for the software upgrade
cycle to kick in (indeed, it's been wise to wait for the bugs in
new versions of Windows to be shaken out after 3-6 months, which
could lead to a slow start for Windows 8.).
My favorite PC play remains
Micron Technology (NYSE:
, which could become a key player in PCs as the migration from
disk-drives made by the likes of
Western Digital (NYSE:
Seagate Technology (NYSE:
to flash-based, solid state drives (
) plays out. Micron and other SSD makers canoffer lightweight,
longer-lasting drives that also have faster seek times.
Risks to Consider:
PC sales are sluggish now and would become even weaker of the
U.S.economy stumbles badly in 2013.
Action to Take -->
These heavy short positionsmean you need to proceed with caution
with these stocks. But it's also important to know that clear
bargains will eventually emerge, so stay abreast of industry events
this autumn and winter as the PC industry is bound to be on a bumpy
ride, and you may wind up with a nice rebound stock on your
-- David Sterman
[Note: Intel is a member of an elite group of investments called
"Forever" stocks. These companies enjoy huge advantages over their
competition... pay their investors increasing dividends... and buy
back massive amounts of their own shares. So far, only found 10
stocks that make the grade. If you'd like to learn more about
"Forever" stocks -- including several names and ticker symbols --
follow this link.]
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of INTC in one or more if its "real money" portfolios.