There continues to be a bearish bias toward the technology sector, a residual effect of the 2001 "tech wreck" bear market and the painful losses that many traders experienced during the 70% decline in the
Nasdaq from 2001 through 2003.
Traders have been reluctant to believe wholeheartedly in a broad-based technology renaissance, taking the group higher in a tepid fashion in spite of the continuing bullish fundamental news flow from the sector.
The bearish bias toward this group has created some interesting value plays in the sector that traders can take advantage of in the coming months. We're not fundamental analysts, but even we find the value proposition and arbitrage opportunities in the technology sector compelling.
The opportunities in
EMC
(EMC)
and
Cypress Semiconductor
(CY)
seem especially interesting.
Both EMC and Cypress have spun out companies that are doing exceptionally well. EMC spun off
VMWare
(VMW)
last year in a highly anticipated IPO, and Cypress spun off
Sun Power
(SPWR)
, which is a strong name in the hot solar sector.
The stakes EMC and Cypress hold in their respective spinoffs have taken off, leaving both companies substantially undervalued once we back out the shares held by the companies. EMC owns an 87% stake in VMWare, which is valued at $29.7 billion. EMC is valued at only $40 billion, which means that once you back out the value of VMWare, the remaining value of EMC is only $10.3 billion, or $5 a share.
Cypress is even more ridiculous with their 53% stake in SPWR valued at $6 billion vs. a market cap of $5.8 billion for the company, which places the value of Cypress at -$200 million. We could be wrong, but we believe that Cypress Semiconductor is probably worth more than -$200 million.
Traders who want to lock down the spread between these stocks and the spinoffs can short the spinoffs (Sun Power, VMWare) here and go long the issuing companies (EMC, Cypress), which would protect investors if the spinoff names weakened and moved lower. A more conventional approach would be to simply buy Cypress and EMC at these levels and view the value of the spin-off names as a downside buffer.
Technically, EMC and Cypress are in bullish overall positions. EMC and Cypress trended strongly to the upside over the last year, but both stocks have weakened recently as SPWR and VMWare took hard hits off of the October highs.
The action in EMC and Cypress will mimic their counterparts for the time being, but right now that's not necessarily a bad thing. EMC is trying to turn up, and we would look for EMC to continue to recover along with the market in the coming weeks. Cypress is stronger and is taking a run at the highs set in October. The solar group has been gaining strength recently, and it's paying off for Cypress, which we believe will continue trending higher along with the solar stocks.
The comparative performance between Cypress and EMC vs. Sun Power and VMWare continues to widen. The spinoffs are outpacing the larger companies to the upside, and they're making the value proposition even more compelling. If the market holds together and moves higher in 2008, long trades in EMC and CY should perform well and provide good value, as well as strong upside momentum.
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