RealMoney Silver - Best Buy and RIM Will Set the Tone for Tech

Best Buy and RIM Will Set the Tone for Tech
By Michael Comeau
Breakout Stocks Portfolio Manager
4/1/2008 2:04 PM EDT

During quarterly conference calls, investors typically focus on the minutiae of company-specific operating trends. But these days, investors only want to know about macro trends affecting the industry. Clearly, there's a great deal of concern about the broader spending environment.

On Wednesday, the tech world will get a lot of information on the macro picture. Consumer electronics retail giant Best Buy (BBY) and Research In Motion (RIMM) , creator of the BlackBerry line of smartphones, are set to report.

Best Buy is a bellwether for consumer technology spending. Unlike competitors such as Circuit City (CC) , Best Buy is a highly competent operator, but that won't shield it from slowdowns in consumer spending. Best Buy lowered guidance on Feb. 15, noting soft domestic customer traffic in January.

That period should have been reasonably strong because of holiday gift card redemptions and the lead-in to the Super Bowl. Best Buy noted that demand for home theater systems, mp3 players and digital cameras was weak, somewhat offset by strong notebook PC demand.

A month has passed, and we'll soon get a deeper look at these trends, so holders of consumer-electronics-levered stocks should pay close attention to Best Buy's commentary.

Key names that could move off the report include Corning (GLW) , which should be benefiting from the shift toward LCD televisions, PC names such as Intel (INTC) and Hewlett-Packard (HPQ) , and Apple (AAPL) , whose Mac and iPod products are sold in Best Buy stores.

I am particularly curious to hear what Best Buy says about the navigation category, which I believe is slowing dramatically. Any slowdown would affect Garmin (GRMN) big time. Back in mid-February, Best Buy noted that "we'll also reset the GPS area to maximize the customer experience." To my mind, the need for a "reset" implies poor sales. That sentiment was confirmed by a recent preannouncement of weakness by the GPS-chip maker SiRF Technology (SIRF) . (Here's a deeper look at SiRF's announcement.

I believe Best Buy is a great short at these levels. Simply put, there aren't any strong new product cycles coming to offset the slowing/dying ones. That should have a significant impact on store productivity. In addition, I am very concerned about the potential for a big slowdown in sales of high-margin home-theater installation services and extended warranties as housing slows and consumers trade down to cheaper products.

As for RIM, the company has increasing consumer exposure, thanks to its successful Pearl and Curve smartphones. The question is, how will a high-growth, productivity-enhancing category like mobile email fare in a slowing economy?

Expectations are fairly high, with analysts issuing bullish reports left and right in response to their channel checks. RIM already announced better-than-expected subscriber additions for the quarter. Even my own informal (as in, not-to-be-relied-upon) talks with employees in mobile-phone stores have revealed very strong demand for BlackBerry products.

Here's the tricky part: Financial-services companies have been laying off employees, and that phenomenon is spreading out to related parties like law firms. So while I'm a huge long-term bull on mobile email, Research In Motion's secular growth could be facing some cyclical challenges in the near term. Yet any modest slowdown from RIM's recent hyper-growth on the enterprise side could be offset by strength of the aforementioned Pearl and Curve consumer products, the latter of which will hit Verizon (VZ) in May.

RIM's shares will be driven by conference call commentary regarding the macro picture, especially at such a sensitive economic time. I like RIM 12 to 18 months out, but anything short of robust confidence in the outlook will hit the stock. In addition, the market will be looking for a bullish outlook for the upcoming BlackBerry 9000.

If you're looking for plays off of RIMM, forget the component makers, service operators and competitors. My No. 1 play off of RIM is to short VMWare (VMW) if RIM's guidance disappoints. Though the two companies target different markets, any problems at RIMM will tell investors that nothing in enterprise is safe. Despite falling over 65% off its highs, VMWare is still a very expensive stock and could be among the first enterprise names thrown under the truck in the wake of disappointing RIM guidance.