Technology Report Weekly Roundup

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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 20% gain.

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.

Long Positions

ONES

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 $13.38.

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 Web surfing.

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 lower level.

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 on weakness.

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 37.6% undervalued.

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 earnings results.

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 aware of.

TWOS

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 a turnaround.

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.

Regards,

Richard Suttmeier

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