The technology industry has seen its fair share of up and down this year, with companies like NVIDIA (NASDAQ: NVDA) swinging for a near tripling and other giant names like Apple (NASDAQ: AAPL) beginning to show double-digit pullbacks recently. As always, specific trends and pivots within the industry drive these price behaviors.
According to July's ISM manufacturing PMI report, the computer industry has been in a bit of a contraction lately, as respondents within the report pointed out that customers are "... reducing or not placing orders as forecast." a trend that was experienced in Apple's very own PC department.
Some less popular names in the industry are worth looking at, especially on forecasted price pullbacks from current resistance levels, a simple strategy enabling investors to catch high-quality names at reasonable prices right as the underlying industry begins to bottom out.
Markets have been excited about one segment within a tried-and-tested industry name. Hewlett Packard Enterprise (NYSE: HPE) has some favorable tailwinds that can push the stock higher before the year ends. Considering that a good % of revenue, 18%, comes from the 'Intelligent Edge' segment, it would be beneficial to look at its trends.
According to the company's latest quarterly results, this segment grew by 56% over the year, pushed by trends in 'return to office' and back to school. Demand for this segment is rising, as it mainly provides network systems, namely Local Area Networks (LAN).
Another competing segment is the 'Computing' side of the business, which contracted by 3% as most of the market share went directly to names like NVIDIA. Analyst ratings suggested a 4.5% downside to the stock, perhaps driven by the will take for demand to hit coupled with current technical patterns.
Looking at Hewlett's chart, it will become evident that the current prices are facing strong resistance at $17.75 to $18.25 per share. Breaking past these levels won't be likely, considering earnings will be announced soon on August 29, and markets expect a slowdown, as the PMI report suggests.
The best thing investors can do is await the coming earnings announcement and consider purchase levels at the proximate support, which in this case happens to be the $12.50 to $13.50 range.
Once orders in the industry inevitably bottom and those overvalued names begin to fall, investors will have the chance to own this stock at the best possible price, considering it would be lower than today's already cheap forward P/E of 8.3x relative to the industry's 22.5x average.
As a company that mainly derives its revenues from selling personal computers and accessories, it is no surprise that analyst ratings point to a net 6.7% downside in HP (NYSE: HPQ) stock today. However, the story begins to rhyme as investors have a chance to piece together one market-beating game plan around the name.
Despite posting massively positive second quarter 2023 earnings, where the company beat earnings per share guidance by more than double, markets don't seem too excited about the next quarter, due to be announced by August 29.
Considering that markets are only expecting a 6.3% growth in EPS for 2024, which is significantly inferior to the industry's average of 21.4%, it makes sense why this name will likely see a pullback upon announcing its subsequent earnings.
However, as demand inevitably comes around, sentiment will change, allowing investors to scoop one of America's most prominent computer names at fire sale prices. Again, a massively undervalued 9.0x forward P/E next to an industry average of 22.5x.
International Business Machines
While not as exposed to the PC market, International Business Machines (NYSE: IBM) suffers from a similar computing and software trend. Software revenue rose by 7% over the past year, while Infrastructure revenue declined by as much as 15% during the same period.
These results from the second quarter of 2023 will paint a reliable picture of the future. As long as NVIDIA keeps dominating the computing and infrastructure markets, all of these names will fall into the 'unpopular' list of needs.
However, this dark, cold corner of the markets is where value investors always thrive by purchasing high-quality assets that everyone else seems to be ignoring. So when it comes to October 25, IBM is expected to report a similar slowdown in its quarterly earnings, giving investors a better price to consider buying.
Considering IBM's chart, investors can see the level of resistance currently being encountered, a rejection and pullback that can be brought on by markets ignoring this titan of industry. A $145 to $150 per share buy for a breakout can be easily replaced for a $115 to $120 resistance buy for an upswing.
How can investors feel secure that there will be a pullback? Consider the EPS expected growth rate in 2024 of 4.3%, falling below the industry's 21.4% average. Money likes growth, and as long as IBM keeps posting its reliable double-digit advances in all the unpopular segments, markets won't see it as a famous name.
Again, value investors can thrive and acquire a market-beating asset at attractive valuations once the pullback is ignited by ignorance.