Forget the heat -- it's January in July, with the Nasdaq
right back where it started the year. From its April 29 low
of 1890, the index has climbed all the way back to its 2005
opening-day high of 2191, set Jan. 3. So the tech-led rally
now measures 15.9% from low to high. Over the same period,
the Philadelphia Semiconductor index (SOX) is up 26.6%.
The gains over the past two weeks only further emphasize
the importance of the crossover of the SOX's weekly moving
average, which occurred at the weekly close on July 8. To
review, the five-week modified moving average closed above
the 200-week simple moving average for the first time since
November 1998. This confirmed semiconductor leadership in
the market and signaled that the SOX was poised to move
even higher. From the July 8 close to the high of July 22,
the SOX has moved up 8.5%.
Earnings season shifted into high gear this week, with
mixed reactions to reports. Apple (AAPL:Nasdaq), IBM
(IBM:NYSE) and eBay (EBAY:Nasdaq) have been among the
winners, while Intel (INTC:Nasdaq) and Yahoo! (YHOO:Nasdaq)
saw pullbacks as the Street's high expectations were too
tough to beat.
IBM began the parade, reporting better-than-expected
earnings after the close Monday. That raised the bar for
Intel, Motorola (MOT:NYSE) and Yahoo!, all of which
reported after the close Tuesday. Although all three turned
in solid earnings, expectations were too lofty by this
time. Intel and Yahoo! sold off on Wednesday, while
Motorola traded to a new 52-week high at $20.14. But
despite the weakness in Intel and Yahoo!, the Nasdaq and
SOX powered to new highs for the year on Wednesday, setting
the stage for the next round of key earnings reports.
In addition to Intel, a number of other portfolio members
reported earnings this week, including: EMC (EMC:NYSE),
Microsoft (MSFT:Nasdaq), QLogic (QLGC:Nasdaq), RSA Security
(RSAS:Nasdaq), SBC (SBC:NYSE), Teradyne (TER:NYSE), Xilinx
(XLNX:Nasdaq), and my latest addition, VeriSign
(VRSN:Nasdaq). Next week, the following portfolio members
report: Texas Instruments (TXN:NYSE) on Monday; Sun
Microsystems (SUNW:Nasdaq) on Tuesday; Integrated Device
Technology (IDTI:Nasdaq) on Wednesday; and Gateway
(GTW:NYSE), Newport (NEWP:Nasdaq), Symantec (SYMC:Nasdaq)
and Zygo (ZIGO:Nasdaq) on Thursday.
Next week's economic releases include home-sales data,
consumer confidence, durable goods orders, the GDP data for
the second quarter, and the release of the Federal
Reserve's beige book for the Aug. 9 FOMC meeting. My
expectations are for housing to remain robust; consumer
sentiment to continue to improve; durable goods orders to
keep rising; and for second-quarter GDP to remain stable
between 3.5% and 4%. Solid data from these releases would
confirm my thesis that tech stocks will continue to lead
the market in the second half of 2005.
For the week, the technology sector ended 14.2% undervalued
vs. 16% last week. Computer manufacturers ended the week
24.4% undervalued vs. 26.4% last week, semiconductors ended
the week 18.8% undervalued vs. 21.4% last week, and
software was 17.9% undervalued vs. 18.7% last week. There
are no other sectors that are undervalued by 5% or more.
Four sectors, up from three last week, are now overvalued
by 5% or more: consumer nondurables is 7.7% overvalued;
energy, 10.7%; finance, 5.4%; and public utilities, 7.5%.
With technology still the cheapest sector, a rotation into
technology remains an appropriate investment strategy.
Supporting the shift to technology was a report this week
by IDC, which showed that second-quarter global PC
shipments rose 16.6% year over year. Low-cost computer
systems, notebooks and commercial PC replacements are
helping drive demand. This should benefit Gateway and Sun
Micro, two of my turnaround stories in technology. Gateway
is gaining orders for low-end PC-based products, while Sun
is penetrating global data centers.
The benchmark Technology SPDR (XLK:Amex) ended the week
down 0.24%, while the S&P 500 was up 0.47%. Since its
inception April 4, the model portfolio is up 6.70%
(including cash) vs. a gain of 8.32% for the XLK and 5.19%
for the S&P 500.
The model portfolio's gain since its inception on the
dollars invested is 9.38%. Of 18 open positions, three are
outperforming the XLK and also show double-digit gains.
Several trades this week yielded some nice profits. I
locked in an 11% gain on 125 shares of QLogic on Tuesday,
and then added back the shares on Thursday after the stock
had sold off. Also on Tuesday, I trimmed the Intel position
before the company's earnings report, booking a 6.5% gain
on 125 shares; Wednesday, I was able to add back 150 Intel
shares at a lower price. Last, Teradyne gapped up Wednesday
morning following the company's earnings report after the
close Tuesday. The company reported a larger-than-expected
quarterly loss, but raised guidance for the third quarter --
setting up the opportunity to close this position for a
Also, a new stock joined the portfolio this week. On
Thursday, I added 150 shares of VeriSign, which was down
more than 16% after reporting earnings after the close
Wednesday. The company's lowered guidance propelled the
selloff, which looks overdone given VeriSign's business
segment in the cyber security space.
Now let's recap all of the portfolio holdings. A quick
reminder on the rating system: Ones are stocks that are
buys right now. Twos are stocks that are buys on a pullback
in price. Threes are stocks that are sells on strength in
price. Fours are stocks that should be sold right now.
Gateway (GTW:NYSE, $3.98, 1,200 shares, 4.31% of the
portfolio): I added 1,200 shares of Gateway on July 6 at
$3.42 a share. The company is 70.5% undervalued. My price
target is $6.70, below the 52-week high at $6.92, as I
expect the stock to rebound to 50% of its fair value at
On Wednesday, Gateway announced that it is selling its
notebook computers through 875 Staples stores to take
advantage of increased back-to-school demand. The company
also introduced a new line of notebook PCs with a 17-inch
screen targeted to back-to-school demand. The following
day, Gateway announced a $2.7 million contract to provide
products and services to the U.S. Navy to be used in more
than 300 naval ships and submarines. This venture will
allow sailors to communicate with friends and family via
the Internet, and enjoy online activities such as games and
Integrated Device Technology (IDTI:Nasdaq $10.78, 375
shares, 3.65%): I added 375 shares of IDT to the portfolio,
at $10.42 on July 11. IDT shares are 49.4% undervalued. My
price target is the 52-week high at $21.25, which I expect
shares to reach in the second half of 2005.
The company reports quarterly earnings on Wednesday, July
27, and is expected to earn 5 cents a share. In an alert on
Monday, I said that I would add another 375 shares if the
stock fell to $9.85, but it never traded that low this
week. I will update the status of this strategy in an alert
this coming Monday.
Newport (NEWP:Nasdaq, $14.66, 300 shares, 3.97%): I added
300 shares of Newport to the portfolio at $14.17 on July
11. Newport shares are 58.4% undervalued, and my price
target is the 52-week high at $16.35, which I expect the
stock to reach in the second half of the year.
Newport's earnings report is Thursday, July 28, and the
consensus estimate is for EPS of 14 cents. Again, in
Monday's alert, I said that I would add another 300 shares
of Newport at $13.99, but the stock remained above that
price this week. I will update the status of this strategy
in an alert this coming Monday.
QLogic (QLGC:Nasdaq, 32.04, 275 shares, 7.95%): The
original position of 150 shares was established on May 11
at $29.39. This week, a second lot of 125 shares was
removed on Tuesday at $34.30 and then returned to the
portfolio on Thursday at $31.10. QLogic is 33.8%
undervalued, and my price target is my monthly risky level
at $38.50, which the stock should reach in the second half
of 2005. (Remember, a risky level is where investors will
likely trim holdings, according to my models.)
QLogic topped earnings expectations by 2 cents when it
reported Wednesday. The company earned 45 cents a share,
citing strong sales of its fibre channel products. In fact,
on Monday, research firm IDC released a report that ranked
QLogic first in market share for both fibre channel host
bus adapters shipped and fibre channel revenue in calendar-
year 2004. Then, weakness on Thursday was caused by broker
downgrades by Piper Jaffray, Bear Stearns and Smith Barney,
in part because of concerns that growth may be slowing.
This provided the opportunity to add back shares at the
RSA Security (RSAS:Nasdaq, $12.06, 325 shares, 3.54%): I
added 325 shares of RSA to the portfolio at $12.21 on July
11. It is 52.2% undervalued, and my price target is the
stock's 52-week high of $23.91, which I expect the company
to achieve in the second half of 2005.
After the close Thursday, RSA Security reported earnings
for its second quarter. EPS matched Street estimates of 12
cents and the company indicated that it is on track for
improved performance in the second half of 2005, but I did
not see any specific projections. Given the recent
terrorist attacks in London and the U.S. Homeland Security
Department's new initiatives against cyber-terrorism, I
expect RSA to gain momentum in several new security-related
authentication products later this year. On Monday, I will
include in my alert a level at which to add to the position
Sun Microsystems (SUNW:Nasdaq, $3.88, 3,000 shares,
10.50%): This position consists of two lots -- 1,500 shares
added at $3.55 on April 21, and another 1,500 shares at
$3.75 on June 2 -- for an average cost basis of $3.65. My
price target is the 52-week high at $5.65, which I expect
the stock to reach in the second half of 2005. Excluding
the impact of the pending purchase of StorageTek
(STK:NYSE), which is 11.8% overvalued, Sun ended the week
Sun reports its quarterly EPS on Tuesday, July 26, and is
expected to earn a penny per share. It is quiet on the news
front, which is typical during the week before reporting
Time Warner (TWX:NYSE, $16.64, 450 shares, 6.76%): This
position consists of two lots -- 225 shares purchased at
$17.47 on April 4, and another 225 shares at $17.16 on
April 20 -- for an average cost basis of $17.32. Time
Warner is 38.3% undervalued. My price target is $27.25, the
stock's fair value, which I expect it to reach in the
second half of 2005.
The company reports earnings on Tuesday, Aug. 2, and is
expected to earn 19 cents a share. According to Reuters,
Time Warner's stock performance in the second half of 2005
will depend on the turnaround at America Online -- a theme
I've expressed since the model portfolio's inception, when
this stock joined the lineup. The Internet unit has
revamped its AOL.com Web site into a potential online
advertising cash generator; and in my opinion, with the
entertainment industry slumping, investors should focus on
the turnaround at AOL. If AOL's gain in ad revenue
surpasses that of the industry, Time Warner shares should
finally start to move higher.
VeriSign (VRSN:Nasdaq, $24.70, 150 shares, 3.34%): This 150-
share position was added to the portfolio at $24.06 on July
21. This stock is 39.3% undervalued with a fair value of
$49.29. My price target is my quarterly risky level at
$29.97, a price I expect the stock to achieve in the second
half of the year.
VeriSign's earnings report Wednesday included lower-than-
expected forward guidance, but this outlook did not include
potential new business in the wake of the London terrorist
attacks. Plus, last week, the Homeland Security Department
established an assistant secretary position for cyber and
telecommunications security. This move should focus more
attention on protecting information technology (IT)
infrastructure from cyber attacks.
Xilinx (XLNX:Nasdaq, $28.35, 150 shares, 3.84%): This 150-
share position was added to the portfolio at $26.52 on June
20. This stock is 38.0% undervalued with a fair value of
$43.55. My price target is my monthly risky level at
$28.85, a price I expect the stock to achieve in the second
half of the year.
After the close Thursday, Xilinx reported in-line EPS of 21
cents. The stock rebounded on Friday, but strength stayed
just shy of my price target at $28.85. I will include a
new target or trading strategy in Monday's alert.
Zygo (ZIGO:Nasdaq, $11.06, 400 shares, 3.99%): I added 400
shares of Zygo to the portfolio at $10.60 on July 11. The
company is 64.6% undervalued, and my price target is the
stock's March high of $14.48, which I expect the stock to
achieve in the second half of 2005.
Zygo reports earnings on Thursday, July 28. Shares traded
up late in the week, but without any catalysts that I am
Cisco (CSCO:Nasdaq, $19.32, 600 shares, 10.46%): This
position consists of three lots -- 225 shares added at
$17.66 on April 4, 175 shares at $19.25 on June 14, and 200
shares at $19.19 on June 27 -- for an average cost basis of
$18.63. Cisco is 35.3% undervalued. My price target is the
stock's 52-week high at $23.69, which I expect it to reach
in the second half of 2005.
Cisco is set to report earnings Aug. 9, and the consensus
estimate is for EPS of 25 cents.
Today, Cisco announced the release of its new Cisco 4400
Series Wireless Local Area Network (LAN) Controller, which
supports up to 100 access points for large-scale networks
that include wireless users. The company also said today
that it acquired Kiss Technology, a Danish maker of
networked consumer devices, in a cash-and-stock deal worth
about $61 million. Kiss makes TVs and DVD players that
link to a home network or the Internet. This deal is
expected to close by the end of October.
EMC (EMC:NYSE, $14.49, 300 shares, 3.92%): EMC rejoined the
model portfolio at $13.75 on June 29, and shares are now
60.3% undervalued. My price target is $15, which approaches
the stock's 52-week high at $15.09 and is a price I expect
EMC to reach in the second half of 2005.
EMC reported EPS of 12 cents on Thursday, matching the
consensus estimate. Even though the company reported
strong demand for storage systems and services, it warned
that third-quarter earnings would miss Wall Street
estimates. The stock dropped from $14.42 at Wednesday's
close to $13.60 -- just above my quarterly value level at
$13.55 -- after the report. (A value level is a price at
which buyers should re-emerge.)
Intel (INTC:Nasdaq, $26.75, 475 shares, 11.46%): This
position consists of three lots -- 175 shares added at
$23.10, 150 shares at $26.19 on June 27, and 150 shares at
$26.95 on July 20 -- for an average cost basis of $25.18.
Intel is 29.6% undervalued. My price target is my quarterly
risky level at $30.98, which I expect the stock to reach in
the second half of 2005.
Following its earnings report after Tuesday's close, Intel
traded lower, despite beating the consensus estimates. The
stock closed at $28.71 on Tuesday, but on Wednesday it
tested my monthly value level at $26.86, where shares
stabilized as buyers emerged to buy on that weakness. This
volatility surrounding Intel's report gave me an
opportunity to take some short-term gains: I booked profits
on 125 shares at $28.62 prior to the report Tuesday, then
added 150 shares at $26.95 on Wednesday morning as the
stock dipped toward that monthly value level.
Microsoft (MSFT:Nasdaq, $25.68, 150 shares, 3.47%): On June
30, I added 150 shares of Microsoft at $25.06. The software
maker is 15.7% undervalued. My price target is $31.93,
which is the stock's fair value and a price I expect it to
achieve in the second half of 2005.
After the close Thursday, Microsoft said its fourth-quarter
profit was $3.7 billion, or 34 cents a share, up from $2.69
billion, or 25 cents a share, a year earlier. Excluding
various one-time items, Microsoft would have earned 33
cents a share, still beating the consensus of 31 cents.
With so many new-product initiatives, which I described
when I added Microsoft to the portfolio, it was difficult
for the company to provide solid guidance. This caused
shares to fade somewhat in after-hours trading. In its
conference call, the company mentioned PC and server demand
looked strong in the second half of 2005.
The disappointment was on full-year estimates. Microsoft
guided full-year earnings to $1.27 to $1.32 a share on
revenue of $43.7 billion to $44.5 billion, representing
growth of 10% to 12%. Analysts were expecting earnings of
$1.42 a share on revenue of $43.79 billion for the current
fiscal year. Keep in mind that Microsoft has a history of
being conservative with its financial forecasts.
SBC Communications (SBC:NYSE, $23.72, 170 shares, 3.64%): I
added 170 shares of SBC to the portfolio at $23.70 on July
11. The company is 20.8% undervalued, and my price target
is the stock's fair value at $29.94, which I expect it to
reach in the second half of 2005.
SBC reported EPS of 38 cents, beating the consensus
estimate by a penny. Revenue rose to $10.33 billion, up
from $10.20 billion a year earlier, on growth in long-
distance and high-speed Internet broadband services. SBC's
Cingular subscriber base grew by 1.1 million, boosting its
total to 51.6 million customers, the most in the U.S.
wireless market. Next year, the company plans to launch
cable TV services on a broad scale, which should help with
Sirius Satellite Radio (SIRI:Nasdaq, $6.92, 1000 shares,
6.24%): This 1,000-share position was established at $4.81
on April 28. Sirius is 35.3% undervalued, and my price
target is $10.53 per share -- which is the stock's current
fair value. I expect Sirius to reach this price target in
the second half of 2005.
Sirius will release its second-quarter earnings report
before the market opens on Tuesday, Aug. 2. Analysts'
estimates are for a loss of 15 cents a share. The key
metric to watch will be projections of subscriber growth.
Symantec (SYMC:Nasdaq, 23.61, 225 shares, 4.79%): I added
225 shares of Symantec at $18.31 on May 11. Symantec is
23.9% undervalued, and my price target is my annual risky
level at $25.52, a level at which investors should book
profits. I expect the stock to achieve its price target in
the second half of 2005.
The company will report quarterly earnings on Thursday,
July 28, and the consensus estimate is for EPS of 25 cents.
Texas Instruments (TXN:NYSE, $30.76, 150 shares, 4.16%):
This position was added at $22.65 on April 18. The stock is
16.5% undervalued, and my price target is the stock's fair
value at $37.20, a price I expect the stock to reach in the
second half of 2005.
TI will report its quarterly earnings on Monday, July 25,
and the consensus estimate is for EPS of 29 cents.
The final edition will be sent out Wednesday morning.
Booking profits in one position and trimming three others.
Suttmeier's closing this protective position, which is no longer necessary.
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