Tech's hot streak continued as August began, but the
market's selloff in reaction to stronger-than-expected
payroll data Friday morning showed that the Nasdaq may be
ready to retrace some of its well-deserved gains. On
Tuesday and Wednesday, the index tested 2219, a level not
seen since June 2001, but by week's end the Nasdaq had
slipped back to 2178 at the close.
Things are getting more volatile; here are the levels to
keep an eye on in the trading ahead.
My model shows two monthly value levels, or prices where
buyers are likely to re-emerge, for the Nasdaq. The first
is 2162, which if tested on a pullback would be a
correction of only 2.6% -- not a big deal for long-term
investments in technology stocks. The lower monthly value
level is 2060, which would mark a 7.2% correction. That
drop is still not too bad considering that my models show
that the Nasdaq could reach my quarterly risky level at
2381 by the end of the quarter, if not by Labor Day. (A
risky level is a price at which investors are likely to
reduce holdings, according to my model.)
Looking more closely at individual tech measures, the
Nasdaq 100 Trust (QQQQ:Nasdaq) has lagged the broader
average slightly with a high of 40.14, still slightly below
the December 2004 high of 40.33. This means that the market
performance of the largest 100 Nasdaq companies has lagged
the remainder of the index by only a small percentage, but
these companies will benefit the most by the expected surge
in IT spending. So this trend should be ending as the
leadership baton is passed to the likes of Microsoft
(MSFT:Nasdaq) and Cisco Systems (CSCO:Nasdaq), two
portfolio members poised to lead over the next six months.
To recap, from the April 29 low of 1890 to this week's high
at 2219, the Nasdaq gained 17.4%; and the QQQQs were up
16.9%, from $34.35 to $40.14. The Philadelphia
Semiconductor Index (SOX) has been the market leader, up
29.1% from 376.64 to its high this week of 486.34. In this
light, the correction the past two days is not surprising,
but should end next week as long as the Fed does not become
more hawkish concerning inflation. My models show upside
potential to 2381 on the Nasdaq, $42.82 on the QQQQ, and
523.14 on the SOX. These targets are quarterly risky levels
from my models, and if the market gets there, I will be
looking for some short ideas for the model portfolio.
Semiconductors continue to perform well. The Semiconductor
Industry Association (SIA) reported on Monday that chip
sales for the first half of 2005 were up 6.5% vs. the first
half of 2004. The SIA expects semiconductor sales to show
continued strong growth in the second half on increased
sales of PCs and consumer electronics because of back-to-
school and holiday demand for the latest models of items
such as laptops and cell phones. Total chip sales for 2005
are projected at $226 billion, up 6% from 2004.
Speaking of positive surveys, CIO magazine's latest poll on
information technology (IT) spending shows a noticeable
improvement in companies' spending plans in July, and
security software and storage head the list. This does not
surprise me in the wake of the July terrorist attacks, as
companies get more serious about protecting their systems.
In earnings news this week, Sirius Satellite Radio
(SIRI:Nasdaq) reported better-than-expected results,
whereas Time Warner (TWX:NYSE) was a slight disappointment.
On deck for next week is tech bellwether and portfolio
member Cisco, which is expected to report EPS of 25 cents.
Also of interest will be earnings from Dell Computer
(DELL:Nasdaq), which is expected to report EPS of 38 cents.
Economic data this week continued to show a strong economy.
The ISM Index, personal income, factory orders, and this
morning's payroll data all were stronger than expected. On
the docket for next week are readings for July retail sales
and second-quarter productivity. I have been looking for
reduced productivity to help build the need for IT spending
to kick-start productivity gains. Of importance, too, will
be the Federal Open Market Committee (FOMC) decision on
Tuesday about whether to raise the federal funds rate once
again, to 3.5%. As I have noted, the strength of the Nasdaq
has not faded in the face of higher interest rates, and I
expect the FOMC to raise the funds rate to 3.50% on
My fundamental models show the technology sector as the
only undervalued sector now at 12.8% undervalued vs. 13.0%
last week. Health care is at fair value, and seven of 11
other sectors are overvalued by more than 5%: basic
industries, by 6.6%; capital goods, 6.2%; consumer
durables, 10.4%; consumer nondurables, 7.7%; energy, 16.2%;
finance, 5.8%, and public utilities, 8.8%. These figures
make a rotation into technology the most compelling
Within technology, computer manufacturers ended the week
25.1% undervalued vs. 25.0% last week; semiconductors ended
the week 17.2% undervalued vs. 19.0% last week; and
software was 15.6% undervalued vs. 16.7% last week.
The benchmark Technology SPDR (XLK:Amex) ended the week up
0.57%, while the S&P 500 was off 0.63%. Since its inception
April 4, the model portfolio is up 6.86% (including cash)
vs. a gain of 9.35% for the XLK and 4.57% for the S&P 500.
The model portfolio's gain since its inception on the
dollars invested is 8.82%. Of 19 open positions, four are
outperforming the XLK and showing double-digit gains.
This week was a quiet one for the portfolio. With 19 long
positions, and the potential upside on the Nasdaq limited
to about 8% or so through Labor Day, it is difficult to
identify new portfolio stocks. On the other hand, with 8%
or so possible upside over the next four weeks, it is
equally dicey to short technology stocks at this time. My
models provide value levels at which to buy on weakness,
and risky areas at which to reduce on strength, but this
week's appropriate levels were not tested.
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.
Cisco (CSCO:Nasdaq, $19.30, 600 shares, 9.46% 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 32.4% undervalued.
My price target is the stock's fair value at $28.90, which
I expect the stock to reach by the end of the year.
According to an independent research company that
specializes in channel checks, Cisco's deal pipeline is
strong, with either steady or less time required to close
deals. There is increased demand for IP telephony, security
and storage solutions, and these sources see limited
competition and no discounting of prices. This is a great
environment for Cisco when it reports earnings on Aug. 9.
Gateway (GTW:NYSE, $4.03, 1,200 shares, 3.95%): I added
1,200 shares of Gateway on July 6 at $3.42 a share. The
company is 66.5% undervalued. My price target is my
quarterly risky level at $5.59.
On Wednesday, Gateway said it would release its second-
quarter earnings on or before Aug. 15, pending finalization
of accounting for the Microsoft (MSFT:Nasdaq) agreement
regarding antitrust issues, which was signed in April. I
will update readers with details once the company files its
Gateway has been gaining sales in 2005 for its information
technology products at major businesses and organizations,
which is helping its turnaround. On Friday, it announced a
deal with the University of Texas at San Antonio to provide
notebook and tablet computers for some 26,000 students and
3,500 staff members. Students are being offered special
discounts and initiatives, including the waiving of
interest charges. This is a four-year agreement, and deals
such as this should benefit Gateway long term as students
are likely to stick with Gateway products as they enter the
job market after graduation.
Integrated Device Technology (IDTI:Nasdaq $11.12, 375
shares, 3.41%): I added 375 shares of IDT to the portfolio
at $10.42 on July 11. The shares are 44.0% undervalued, and
my price target is the stock's 52-week high at $21.25,
which I expect it to reach by the end of the year.
Last week, IDT refiled regulatory documents pertaining to
its proposed merger with rival chipmaker Integrated Circuit
Systems (ICST:Nasdaq), which reports earnings next week.
Wall Street expects ICS to earn 19 cents per share. The
acquisition should close later this year, according to IDT,
pending shareholder approval. The combined IDT/ICS will be
a specialty chipmaker for communications gear, computers
and electronic devices.
Juniper Networks (JNPR:Nasdaq, $23.63, 175 shares, 3.38%):
I added 175 shares of Juniper to the portfolio at $23.70 on
July 25. My model shows Juniper 52.6% undervalued. My price
target is my quarterly risky level at $33.37. I expect the
shares to reach this price target in the second half of
On Tuesday, Juniper announced that Cybera, a high-speed
networking services provider, has begun using its routing
platforms and firewall protection products to enhance
performance, security and reliability. This deal shows that
Juniper will be gaining business as corporate networks
upgrade to meet the increased demand for broadband.
Microsoft (MSFT:Nasdaq, $27.76, 150 shares, 3.40%): On June
30, I added 150 shares of Microsoft at $25.06. The software
maker is 11.3% undervalued. My price target is $30.73,
which is the stock's fair value and a price I expect the
stock to achieve in the second half of 2005.
New catalysts for growth are being launched at Microsoft
with several new products. In its just-ended fiscal 2005,
revenue grew 8% to $39 billion. New versions of Windows,
Office and Xbox are among the products that should turn
Microsoft into a growth company in 2006. At last week's
analyst/shareholder meeting, the company indicated that it
expects sales growth to accelerate to 10%-12% in fiscal
Newport (NEWP:Nasdaq, $13.45, 600 shares, 6.59%): 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 56.4%
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.
Shares of Newport rebounded this week, from last Friday's
postearnings low of $12.88 to this week's high of $14.24,
up 10.6% -- but then shares sold off Thursday and Friday
along with the broader market, ending the week at $13.45.
Open Text (OTEX:Nasdaq, $12.15, 325 shares, 3.23%): I added
325 shares of Open Text to the model portfolio on July 26
at $12.24. The stock is 58.9% undervalued, and my price
target is my semiannual risky level at $18.34, which I
expect shares to achieve by the end of 2005.
On Tuesday, Open Text announced that Siemens (SI:NYSE ADR)
would increase its use of Open Text content-archiving
software to create a globally accessible central archive
system. This IT enhancement was necessary to handle new
compliance issues, and should reduce Siemens' expenses and
increase efficiency. As this deal shows, Open Text is
positioned to gain business as corporations upgrade their
compliance-related communications software.
To review, Open Text provides what's called enterprise
content management (ECM) software to connect people,
processes and information in global organizations. The
company's reach is worldwide, with its software in use at
20 million seats in offices in more than 100 countries.
QLogic (QLGC:Nasdaq, $32.64, 275 shares, 7.33%): 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 23.3% undervalued, and
my price target is my quarterly risky level at $39.35,
which the stock should reach in the second half of 2005.
QLogic continues to win awards for its products, and this
week won the "SAN Product of the Year" award from Storage
Magazine for its SANbox 5200 Fibre Channel stackable
switch. QLogic should benefit from this recognition, given
the demand that's expected for this product during the IP
upgrade cycle, which has only just begun.
RSA Security (RSAS:Nasdaq, $13.02, 325 shares, 3.46%): I
added 325 shares of RSA to the portfolio at $12.21 on July
11. It is 45.8% undervalued, and my price target is the
stock's quarterly risky level at $17.44., which I expect
the company to achieve in the second half of 2005.
On Thursday, RSA Security launched a new product called
Best Practices Framework that's designed to help global
business enterprises secure computer data from hackers.
This software reduces the risk that critical customer
information can be stolen for such things as identity
theft, which has exploded in recent years.
Sun Microsystems (SUNW:Nasdaq, $3.72, 3,000 shares, 9.12%):
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 23.5% undervalued.
After reporting an unexpected quarterly profit, Sun Micro
is set for more turnaround growth in fiscal 2006. Sun's
book-to-bill ratio is now positive, and even after spending
$4.1 billion for Storage Technology (STK:NYSE) the company
still has $3 billion in cash for more acquisitions.
On Monday, Sun Micro announced that General Electric
(GE:NYSE) is deploying its Sun Java System Identity Manager
across all of its business units, for a total of 450,000
units around the world. This allows GE to automatically
monitor employee information, including an employee's job
function. The win for Sun is having another of its
applications in a major data center.
According to published reports, a Sun Microsystems
executive has identified India as one of four countries
that will receive "major investments" as part of the
company's Global Mission Charter for Financial Year 2006.
Sun Micro will be investing in several global service
centers, anticipating growth in Bangalore, India; Prague,
Czech Republic; St. Petersburg, Russia; and Beijing.
Expanded facilities will help Sun gain a competitive edge
in winning business at the major data centers in those
Time Warner (TWX:NYSE, $18.09, 450 shares, 6.65%): 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 33.0% undervalued. My price target is $27.77, the
stock's fair value, which I expect it to reach in the
second half of 2005. The stock closed this week above its
200-week moving average at $17.75 for the first time since
breaking below it in September 2001 -- a sign the weekly
chart is anticipating that the company's turnaround will be
Time Warner has been in the model portfolio since the
beginning in April, and I sent out an alert to subscribers
following its earnings report on Wednesday updating my
perspective on this position. As CEO Dick Parsons indicated
to viewers on CNBC -- just as my alert was posted --
investors should be patient with the turnaround at Time
Warner's America Online business. I expect the AOL portal
services to compete successfully with the likes of Google
(GOOG:Nasdaq) and Yahoo! (YHOO:Nasdaq) for coveted
advertising dollars once these new enhanced services have
On Thursday, America Online said that it has purchased
Xdrive, an online storage company, to meet anticipated
growing demand from consumers who are expanding their
collections of digital music and photo files. Xdrive will
continue to sell storage and backup services as a
subsidiary of AOL.
VeriSign (VRSN:Nasdaq, $24.95, 150 shares, 3.06%): 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.
VeriSign was added to the portfolio on a negative reaction
to its earnings on July 20. Since its low of $23.45 on July
21, it has traded as high as $26.62, up 13.5%. This
shows the importance of having the investment discipline to
buy when a stock becomes 40% undervalued.
On Thursday, Jamster! a wholly owned subsidiary of
VeriSign, announced that it is the exclusive provider of
mobile content for "Scream Tour IV: The Heartthrobs" a
concert tour featuring hip-hop and rhythm-and-blues artists
such as Bow Wow, Omarion, Marques Houston and 3on3. I don't
know these artists, but I know that young cell-phone
users will be looking to download ringtones from Jamster!
that focus on these performers.
Xilinx (XLNX:Nasdaq, $27.82, 150 shares, 3.41%): This 150-
share position was added to the portfolio at $26.52 on June
20. The stock is 28.8% undervalued. My price target is my
monthly risky level at $30.85, a price I expect the stock
to achieve in the second half of the year.
On Tuesday, Xilinx announced that it was collaborating with
Siemens Medical Solutions to help develop 3D medical
imaging solutions. Siemens chose Xilinx in part because of
its Virtex-4 programmable technology, as well as the
technical expertise of the Xilinx design services team.
With this deal, Siemens Medical Solutions has become a
member of the Xilinx Alliance Program. As companies become
members and learn about Xilinx products, they are more
likely to choose those products in IT deployments.
Zygo (ZIGO:Nasdaq, $11.20, 400 shares, 3.66%): I added 400
shares of Zygo at $10.60 on July 11. The company is 57.9%
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.
There was no company-specific news of note on Zygo this
EMC (EMC:NYSE, $13.68, 300 shares, 3.35%): EMC rejoined the
model portfolio at $13.75 on June 29, and shares are now
58.8% undervalued. My price target is my monthly risky
level at $15.15, and a price I expect EMC to reach in the
second half of 2005.
In a newsy week for EMC, on Monday, Banc of America
Securities reiterated its buy rating for EMC, including a
price target of $15.25. Then on Wednesday, EMC introduced
four new models of its CLARiiON Disk Library disk-based
backup and recovery solution. These new models feature
hardware and software products that offer twice the
performance and capacity of previous models.
Last, on Thursday, EMC told investors that it would
continue to buy back shares, and expected revenue to grow
14% in 2006. The company also reaffirmed full-year 2005
guidance, including EPS of 50 to 51 cents on $9.6 billion
Intel (INTC:Nasdaq, $26.77, 475 shares, 10.39%): 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 18.4% 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 announced on Monday that it had opened four platform-
definition centers around the world -- in Bangalore, India;
Cairo, Egypt; Sao Paulo, Brazil; and Shanghai, China. These
centers will be used to educate local IT professionals on
how to develop computing products based on Intel
technology, and will identify specific environmental issues
in these key markets. Intel is well-positioned to benefit
from economic growth in these emerging markets.
On Wednesday, Intel said it was partnering with Boeing
(BA:NYSE) to provide an in-flight Wi-Fi service. Boeing's
Connexion Wi-Fi service will support Intel's Centrino
mobile-chipset technology. With this service, travelers can
surf the Web, check email and access corporate data while
SBC Communications (SBC:NYSE, $24.61, 170 shares, 3.42%): I
added 170 shares of SBC to the portfolio at $23.70 on July
11. The company is 21.0% undervalued, and my quarterly
risky level is at $29.22, which I expect it to reach in the
second half of 2005.
On Monday, Cingular Wireless (jointly owned by BellSouth
(BLS:NYSE) and SBC) announced a 10-year distribution
agreement with RadioShack (RSH:NYSE), which will give the
wireless carrier more than 5,000 new sales outlets.
RadioShack plans to end its relationship with Verizon
Wireless because RadioShack wants access to the GSM
wireless standard, which Cingular provides.
Sirius Satellite Radio (SIRI:Nasdaq, $6.76, 1,000 shares,
5.52%): This 1,000-share position was established at $4.81
on April 28. Sirius is 28.2% undervalued, and my price
target is $9.68 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 continues to expand its reach. Its radios will soon
become a factory-installed option in certain 2006 Ford
models. The radios will be preactivated so that sales
personnel at dealerships can conduct an in-vehicle service
demonstration. The option will carry a price tag of $195,
with a six-month subscription included. In a separate
announcement, Sirius radios will be available as a
postproduction, dealer-installed option on the 2005 Toyota
Avalon and Lexus GS 300/430. That makes a total of 11
vehicle models at automakers Toyota, Scion and Lexus with
this Sirius radio option.
On Wednesday, Bear Stearns upgraded Sirius to outperform
from peer perform.
Symantec (SYMC:Nasdaq, 22.05, 400 shares, 7.21%): 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 26.2% undervalued, and my
price target is my annual risky level at $25.53. I expect
the stock to achieve this price target in the second half
On Wednesday, Symantec announced that its Norton Internet
Security 2005 software will be preinstalled on new Gateway
and eMachines desktop and notebook PCs. Through this
agreement, customers will receive a 90-day complimentary
subscription to Symantec's protection updates, and will
then be offered the option to purchase a 12-month renewal.
The software package will include Norton AntiSpam, which
filters out spam and protects against email fraud, and the
Norton Personal Firewall, which provides firewall
protection to users.
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.
The market's resilience continues as almost all sectors remain overvalued.
Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.
David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
Every recommendation goes through 3 layers of intense scrutinyquantitative, fundamental and technical analysisto maximize profit potential and minimize risk.
More than 30 investing pros with skin in the game give you actionable insight and investment ideas.
Want more than one service? Sign up to one of our packaged services and take advantage of amazing savings!
After the Bell
Before the Bell
Jim Cramer's Daily Booyah
Winners & Losers