Investors who sold in May and went away for the summer
missed one of the more powerful three-month technology
rallies of the new millennium. There has been no summer
doldrums for the Nasdaq, and even after a 16% gain since
the end of April, the tech-heavy average could hit 2381 by
With the test of 2201 this morning, the Nasdaq is up more
than 300 points since the April 29 low of 1890, and a move
to my quarterly risky level at 2381 tacks on another 8.5%.
(A risky level is where my models project sellers will re-
emerge.) Stronger-than-expected economic data and lower-
than-expected inflation numbers have provided a positive
fundamental backdrop in an environment of volatile energy
costs, higher interest rates and the renewed threat of
Statistically, the Nasdaq is right back where it started
the year. Semiconductor stocks have been the market
leaders since late April, with the Philadelphia
Semiconductor Index (SOX) up 27.5% from its low of 376.64
on April 29 to the high of 480.30 on July 22.
So far, tech earnings this quarter have been quite good,
with guidance overall suggesting that information
technology (IT) spending is on the rise. Demand for
semiconductors -- the nuts and bolts of technology -- is
on the rise. Broadband demand around the world is picking
up, which will require Internet protocol (IP) upgrades.
The recent terrorist bombings in London and Egypt should
lead to an IT upgrade cycle, including new products and
software to help prevent cyber-terrorism -- and the U.S.
Homeland Security Department has set this goal as a
priority. The demand for cell phones, PCs and laptops with
Internet connectivity is growing, with industry surveys
showing demand for computers up 15% to 16% for the second
quarter year over year.
Several portfolio members reported earnings this week,
including: Texas Instruments (TXN:NYSE), Sun Microsystems
(SUNW:Nasdaq), Integrated Device Technology (IDTI:Nasdaq),
Gateway (GTW:NYSE), Newport (NEWP:Nasdaq), and Symantec
(SYMC:Nasdaq). Results were generally positive. More
details are provided below in the stock portion of the
Weekly Summary. Coming next week, Sirius Satellite Radio
(SIRI:Nasdaq) reports on Tuesday, followed by Time Warner
(TWX:NYSE) on Wednesday.
This week's stronger-than-expected economic data for
housing and durable goods orders, and the Federal
Reserve's beige book, prepared for the Aug. 9 FOMC
meeting, show the economy expanding at a solid pace. This
morning's release of GDP for the second quarter of 2005
and the Chicago purchasing managers' index (PMI) support
my view that the economy remains robust, with IT as a
driving force. The key economic data for next week include
the ISM Index, personal income, factory orders and
employment figures for July. In recent months, solid
economic data overall have provided the background for my
positive outlook on technology stocks.
My fundamental models show the technology sector 13.0%
undervalued vs. 14.2% last week; no other sectors are
undervalued by 5% or more. Health care is the only other
undervalued sector, but by only 2.8%. Four sectors are now
more than 5% overvalued: basic industries, by 5.1%;
consumer nondurables, 6.2%; energy, 12.3%; and public
utilities, 6.7%. These valuations suggest that a rotation
into technology remains a desired investment strategy.
Computer manufacturers ended the week 25.0% undervalued
vs. 24.4% last week; semiconductors ended the week 19.0%
undervalued vs. 18.8% last week; and software was 16.7%
undervalued vs. 17.9% last week.
The benchmark Technology SPDR (XLK:Amex) ended the week
down 0.5%, while the S&P 500 was up 0.1%. Since its
inception April 4, the model portfolio is up 6.74%
(including cash) vs. a gain of 8.79% for the XLK and 5.23%
for the S&P 500.
The model portfolio's gain since its inception on the
dollars invested is 8.65%. Of 19 open positions, five are
outperforming the XLK, with three of these showing double-
This week I established two new model portfolio positions,
Juniper Networks (JNPR:Nasdaq) and Open Text
(OTEX:Nasdaq). Also, I booked a 40.7% profit in Texas
Instruments on Tuesday morning, following the company's
upbeat earnings report after the close Monday. Last, I
built up two positions -- Newport and Symantec -- on
weakness Friday after their Thursday earnings reports.
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
Cisco (CSCO:Nasdaq, $19.15, 600 shares, 9.41% of the
portfolio): 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 33.3% undervalued.
My price target is the stock's fair value at $28.95, which
I expect the stock to reach in the second half of 2005.
Cisco will acquire privately held Sheer Networks, which
develops intelligent network and service management
products for large organizations. This continues Cisco's
long-term strategy of growing through acquisitions. The
benefit for Cisco is that Sheer provides advanced
networking applications that configure with Cisco's next-
generation management platform for products targeted to
Service Provider customers. In a separate deal, Motorola
(MOT:NYSE) and Cisco are teaming up to design a cell phone
that can swap phone calls between cellular networks and
office networks using the short-range wireless technology
known as Wi-Fi.
When Cisco reports earnings on Aug. 9, I will be looking
for double-digit sales growth for networking sales, and
accelerating demand for IP telephony, and security and
Gateway (GTW:NYSE, $3.98, 1,200 shares, 3.91%): I added
1,200 shares of Gateway on July 6 at $3.42 a share. The
company is 66.8% 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.
Gateway was scheduled to report earnings on July 28, but
delayed the release until Aug. 4 as the company is waiting
for final guidance from the Securities and Exchange
Commission on how it should account for an April agreement
with Microsoft (MSFT:Nasdaq). Gateway and Microsoft agreed
to a $150 million deal April 11 to work together on
marketing and developing Gateway PC products as part of a
legal settlement. The EPS consensus estimate is 2 cents.
Integrated Device Technology (IDTI:Nasdaq $11.56, 375
shares, 3.55%): I added 375 shares of IDT to the portfolio
at $10.42 on July 11. IDT shares are 42.7% undervalued. My
price target is the 52-week high at $21.25, which I expect
shares to reach in the second half of 2005.
On Wednesday, Integrated Device, which makes chips used in
networking equipment, reported a small rise in profits
that was in line with its recently lowered outlook. Net
EPS for the quarter was 6 cents, beating the consensus by
Juniper Networks (JNPR:Nasdaq, $23.99, 175 shares, 3.44%):
I added 175 shares of Juniper to the portfolio at $23.70
on July 25. My model shows Juniper 55.7% undervalued. My
price target is $28.00, which is 50% of the stock's fair
value price of $55.90. I expect the shares to reach this
price target in the second half of 2005.
Juniper makes routers and other equipment that are needed
to upgrade Internet protocol networks, putting it in a
sweet spot as demand for broadband increases. Last week,
the company reported EPS that beat the consensus and
projected strong demand for its routers, but the stock
declined as some analysts thought the guidance was less
than expected. This gave me a favorable price at which to
add shares to the model portfolio this week.
Microsoft (MSFT:Nasdaq, $25.61, 150 shares, 3.15%): On
June 30, I added 150 shares of Microsoft at $25.06. The
software maker is 16.6 undervalued. My price target is
$31.93, which is the stock's fair value and a price I
expect the stock to achieve in the second half of 2005.
On Thursday, Microsoft told analysts and investors that
the company is back on track to increase market share with
several initiatives that will begin in the second half of
the year. The software giant's new product pipeline for
the next year will be double that of the past three years,
according to CEO Steve Ballmer. The firm expects 5% to 6%
revenue growth in fiscal 2006, with revenue in the $12.85
billion to $12.97 billion range.
Newport (NEWP:Nasdaq, $13.70, 600 shares, 6.73%): I added
300 shares of Newport to the portfolio at $14.17 on July
11, and another 300 shares on Friday at $13.17 for an
average cost basis of $13.67. Newport shares are 54.3%
undervalued, and my price target is my monthly risky level
at $15.41, which I expect the stock to reach in the second
half of the year.
In its earnings report Thursday, Newport said second-
quarter sales were $97.5 million, slightly higher than
first-quarter sales of $97.0 million. The company focused
on its book-to-bill ratio that was above 1.0 for the fifth
consecutive quarter, meaning that orders received exceeded
Open Text (OTEX:Nasdaq, $12.01, 325 shares, 3.20%): I
added 325 shares of Open Text to the model portfolio on
July 26 at $12.24. The stock is 59.8% undervalued, and my
price target is my monthly risky level at $14.83, which I
expect shares to achieve by the end of 2005.
Open Text develops software to manage content that's sent
over the Internet. Given the increased need to secure
networks in the wake of the recent terrorist attacks,
upgrades to network software should be a growth area in
the second half of the year.
QLogic (QLGC:Nasdaq, 31.05, 275 shares, 6.99%): The model
portfolio's original position of 150 shares was
established on May 11 at $29.39. Last week, I traded a
second lot of 125 shares for a gain of 11%, and then added
the shares back on July 21 at $31.10. QLogic is 28.3%
undervalued, and my price target is my monthly risky level
at $38.50, which the stock should reach in the second half
QLogic announced this week that it will be providing host
bus adapters (HBA) to be used in IBM BladeCenter servers.
The industry's first iSCSI blade server platform will
deliver a high-performance storage networking solution
while simplifying networking and making it more efficient.
RSA Security (RSAS:Nasdaq, $12.95, 325 shares, 3.45%): 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.
The company will review its strategy and financial results
on Monday at the Annual America's Growth Capital Growth
Conference. You can tune into a Webcast of the live
presentation at 10 a.m. on RSA's site,
Sun Microsystems (SUNW:Nasdaq, $3.84, 3,000 shares,
9.44%): 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
its pending purchase of StorageTek (STK:NYSE), which is
14.1% overvalued, Sun ended the week 33.0% undervalued.
Sun Micro reported a profit in its fiscal fourth quarter
on Tuesday, and indicated that demand for its products and
services has stabilized. The company is on track for a
very successful 2006, according to CEO Scott McNealy. Sun
reported EPS of 6 cents, well above the 1-cent consensus
estimate. Then on Wednesday, the company announced that it
had signed a deal to provide Sun's Java Enterprise Systems
and Sun's Solaris 10 operating systems to General Motors
Time Warner (TWX:NYSE, $17.02, 450 shares, 6.27%): 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 33.2% undervalued. My price target is $27.25,
the stock's fair value, which I expect it to reach in the
second half of 2005.
In news this week, America Online and ABC News agreed to
continue and augment their content deal, putting another
piece in place for AOL's new portal. Subscribers of AOL
won't miss a beat in their ABC News Now broadcasts, which
are already available on the service. Content remains a
key ingredient to the division's turnaround.
VeriSign (VRSN:Nasdaq, $26.31, 150 shares, 3.23%): This
150-share position was added to the portfolio at $24.06 on
July 21. The stock is 30.7% 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.
Xilinx (XLNX:Nasdaq, $28.36, 150 shares, 3.48%): This 150-
share position was added to the portfolio at $26.52 on
June 20. The stock is 28.4% 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.
In a CNBC interview on Wednesday, Xilinx CEO Willem
Roelandts indicated that the semiconductor industry was
improving and that there are some product shortages among
chipmakers. The CEO said that revenue at Xilinx is split
50/50 between capital goods products, such as networking
and switch equipment, and the consumer products market,
which includes specialized chips for computers and other
electronic devices. He projected slow but steady growth
ahead for the industry and Xilinx.
Zygo (ZIGO:Nasdaq, $11.07, 400 shares, 3.63%): I added 400
shares of Zygo at $10.60 on July 11. The company is 60.0%
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.
EMC (EMC:NYSE, $13.69, 300 shares, 3.36%): EMC rejoined
the model portfolio at $13.75 on June 29, and shares are
now 58.2% undervalued. My price target is $15, near the
stock's 52-week high at $15.09 and a price I expect EMC to
reach in the second half of 2005.
On Monday, EMC announced the release of its largest, new
high-end storage system. The Symmetrix DMX-3 gives
customers tiered storage in a single system, and users can
add processing power by installing additional processor
cards. Demand is expected from customers looking to
replace existing storage platforms with this single
system. Shipments of the system will begin in September.
Intel (INTC:Nasdaq, $27.14, 475 shares, 10.56%): This
position consists of three lots -- 175 shares added at
$23.10 on April 4, 150 shares at $26.19 on June 27, and
150 shares at $26.95 on July 20 -- for an average cost
basis of $25.29. Intel is 18.8% 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.
Intel said this week that it is spending $3 billion to
build a factory in Arizona and another $105 million to
convert an inactive plant in New Mexico to a temporary
test facility to meet growing demand for computer chips.
This initiative will create up to 1,000 new Intel jobs
over the next several years, and the company is expected
to hire 3,000 people during construction. Recently,
officials in Israel and India have indicated that Intel is
also planning to build factories or other facilities in
SBC Communications (SBC:NYSE, $24.45, 170 shares, 3.40%):
I added 170 shares of SBC to the portfolio at $23.70 on
July 11. The company is 20.4% 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.
A future growth area for SBC is Cingular Wireless, which
it owns jointly with BellSouth (BLS:NYSE). Recently
Cingular, the country's largest wireless provider,
announced several multimillion-dollar upgrades to better
serve its more than 51 million customers. Cingular's
network provides service throughout the U.S., including
the top 100 markets. The growth of its network relies on
advanced GSM technology, a wireless communication standard
that covers more than a billion people worldwide.
As part of its 2005 investment, Cingular is deploying high-
speed, third-generation (3G) service to customers in 15 to
20 major markets, with plans to expand to most major
markets by the end of 2006. Customers using the 3G service
will be able to use a wireless handset to make a voice
call, simultaneously check email and browse the Internet
at speeds similar to wired broadband services.
Sirius Satellite Radio (SIRI:Nasdaq, $6.82, 1,000 shares,
5.59%): This 1,000-share position was established at $4.81
on April 28. Sirius is 29.5% undervalued, and my price
target is $9.76 per share -- which is the stock's current
fair value. I expect Sirius to reach this price target in
the second half of 2005.
This week, rival XM Satellite Radio (XMSR:Nasdaq) reported
that it ended the quarter with a total of 4.4 million
subscribers, more than double the number of a year
earlier, and raised its year-end 2005 forecast from 5.5
million to 6 million subs. The cost of adding each new
subscriber fell to $98, vs. $101 in the year-ago quarter,
or $50 per subscriber excluding advertising and marketing
expenses. These are the comparisons Sirius will face when
it reports before the open on Tuesday. Sirus is expected
to post a loss of 15 cents a share on $50.1 million in
revenue. In my judgment, Sirius should be experiencing
similar if not better subscriber growth. A look at their
share prices shows that from their April lows to their
July highs, XM shares are up 42.6% while Sirius is up
Symantec (SYMC:Nasdaq, 21.95, 400 shares, 7.19%): I added
225 shares of Symantec at $18.31 on May 11, and another
175 shares on Friday, July 29, at $22.10, giving me an
average cost basis of $19.97. Symantec is 21.7%
undervalued, and my price target is my annual risky level
at $25.52. I expect the stock to achieve this price target
in the second half of 2005.
From Thursday's close to Friday's low, Symantec's stock
fell 10.3% on the heels of its Thursday night earnings
report. Quarterly revenue of $699.9 million missed
consensus estimates of $712.2 million, although earnings
of 27 cents a share beat by 2 cents. This selloff gave me
an opportunity to add more shares to the model portfolio
Symantec recently acquired security software firm Veritas
for about $10.5 billion, but the deal closed after the end
of the quarter, so results for Veritas were not included
in this report. On its conference call, Symantec was
upbeat on the merger, but lowered guidance for the
combined company to $5.13 billion from $5.3 billion. In my
judgment, when you put together a $13.5 billion merger,
there are enough uncertainties to account for this minor
decline in guidance.
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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