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5 Tech Stocks to Avoid, According to Jefferies

BOSTON ( TheStreet) -- Technology stocks tumbled yesterday. The Nasdaq fell 0.8% and F5 Networks (FFIV) plummeted 22%, highlighting the danger of momentum stocks.

Investment bank Jefferies issued warnings on five technology stocks in its 2011 outlook. The firm said the shares may be trading above their intrinsic fair value. It expects two of them to stagnate and three to drop precipitously in the year ahead. Below, they are ordered by downside potential, from modest to most.

5. Patni Computer Systems (PTI) provides IT services, including application development, maintenance and support, from India. It targets industries, including insurance, manufacturing, retail and utilities, with custom offerings.

In the past 12 months, Patni's sales have risen 4%, but net income has soared 41% amid superior pricing. Third-quarter sales rose 6.9%, but profit tumbled 19% to $29 million. Earnings per share dropped 22%, hurt by a larger float. The gross margin narrowed from 41% to 38%. The operating margin fell from 18% to 16%.

Patni's stock appears undervalued, costing 10-times trailing earnings, 13-times forward earnings and 9.4-times cash flow, 49%, 27% and 42% industry discounts. But, Jefferies expects a cap on upside. It rates the stock "hold" with a $21 target, suggesting little, if any, upside in 2011. Goldman Sachs is more pessimistic, ranking Patni "sell" and predicting a drop of 18% to $17. In total, two researchers advise purchasing the stock, five say to hold it and one recommends selling. Of note: Patni boasts a net liquidity position (cash minus debt) of nearly $318 million.

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