Using Black Swan and Antifragile Analysis for Tech Stocks (UBS, VMW, CRM, AAPL, FB, LNKD, HPQ, NTAP, FIO, IBM, EMC)

Telecom & Wireless

Published: February 19, 2013 8:50 am

Last Updated: December 27, 2013 9:56 am

Nassim Taleb is well known for his work as a trader and professor, as well as the author of the book “ Black Swan.” He often concentrates his work on market volatility and the likelihood of extreme situations or occurrences that can radically move stock prices. The 9-11 attacks on the World Trade Center were a black swan event, devastating and totally unpredicted. His new book “Antifragile” focuses on things that gain from disorder. Are there tech stocks that can gain from disorder as well?

The tech analysts at UBS A.G. (NYSE: UBS) decided it would be interesting to apply some of the principles of Taleb’s book to tech stocks they cover. They point out in their report released today that Taleb advises using optionality to your advantage in finding situations with limited downside but undetermined upside. What matters is not the frequency of being right but the magnitude when you are correct. Also, to favor a barbell approach, both in specific companies that avoid the mushy middle of markets and in your portfolio by mixing low and high-risk assets.

Fragile things hate volatility and uncertainty, while the antifragile thrives on it. The UBS team believes that technology stocks, especially large caps, are inherently fragile, given that the industry structure changes every 15 years or so. They looked for companies riding emerging trends, and point to VMware Inc. (NYSE: VMW) and Salesforce.com Inc. (NYSE: CRM) as examples.

Vendors creating new product categories also scored high as antifragile. This category included names like tech giant Apple Inc. (NASDAQ: AAPL), social media leader Facebook Inc. (NASDAQ: FB) and business networking site operator LinkedIn Corp. (NYSE: LNKD).

One area that the spectrum of fragility did not favor as well was information technology (IT). The UBS analysts pointed out that computing as a service may present more risk than upside for many of the names that they cover. In their coverage universe, they consider Hewlett-Packard Co. (NYSE: HPQ) particularly fragile, given its size and share losses. They also see NetApp Inc. (NASDAQ: NTAP) as caught in the middle as it remains concerned about Fusion-io Inc.’s (NYSE: FIO) niche status. However, International Business Machines Corp. (NYSE: IBM) and EMC Corp. (NYSE: EMC) scored much better and are well-positioned large vendors.

At the end of the day, technology in always changing and evolving. Companies that look to past successes and not to future growth often can find themselves in the stock graveyard. Antifragile tech stocks might be the way to protect a portfolio from rapid technology and consumer shifts.

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