When to buy and sell ITC companies

I’ve been thinking a lot about HP’s decision to buy Simplivity this week; in the process I’ve come across and issue which I’ve never heard discussed before. There’s a 3-year cycle in net profit for the whole industry, which I show – together with my forecast – in this Figure. It has implications for buying and selling IT and Communications suppliers, whether shares or entire companies. I’m sure those of you looking at M&A activity and in the financial community will want to think more about it as you do your forecasts for coming quarters and years.
I’ve been interviewed by TV companies a few times in my career to talk about specific vendors I follow. I’ve almost always been asked whether I think it’s a good time to buy or sell shares in the specific company. My response has always been that that isn’t something I do; it’s not my area of specialisation and financial analysts (like my friend George O’Connor) do it so well. However in my quarterly research at ITCandor I’ve always collected and reported revenue and shipment data as I did for 23 years working for IDC; however I deliberately added net profit and headcount information as standard measurements, because they were becoming increasingly valuable for business planners as the market matured.

Looking at all (now over 160) of the vendors I track, I see growth peaks in Q3 2007, Q3 2010 and Q1 2014 and troughs in Q2 2009 and Q3 2012. My conclusions is that this is a 3-year cycle, which was lengthened by 5 months due to the economic turmoil of the Credit Crunch in 2008-9. As such it’s relatively easy to forecast where the peaks and troughs are going to be in coming quarters, even if it’s harder to predicthow high or low they’re going to be. It’s a good time to sell companies or shares when profits are high and buy them when they’re low – so although I can’t advise you on specific companies, I can suggest that this quarter (Q1 2017) and Q1 2020 will be ones for sellers and Q3 2018 a good one for buyers and I’m adding tis as an unofficial 11th prediction to my earlier report.

Am I overly naïve? Are you already on top of this issue? Please let me know by commenting below.