The rally in tech stocks has wilted in the dog days of
August, but despite this pullback my models suggest that a
rotation into technology remains a compelling longer-term
investment strategy for both fundamental and technical
reasons. Technology remains the most undervalued sector,
according to my models, and the monthly chart profile for
the Nasdaq will keep its positive profile, even on
weakness to 2060.
Since setting a new four-year high of 2219 on Aug. 3, the
Nasdaq has made an orderly pullback, dipping some 3.9% to
its low of 2133 on Thursday, Aug. 18, which was my value
level (a price at which my models project that buyers will
emerge) for this week. Even with this modest correction,
the Nasdaq is up 12.9% from its April 29 low of 1890 to
the Aug. 18 low of 2133.
In part, the decline has been driven by investor concerns
about higher U.S. Treasury yields, which have stabilized
since the Federal Open Market Committee raised the federal
funds rate to 3.5% on Aug. 9, and higher crude oil prices,
which may have peaked with the Aug. 12 high of $67.10.
Plus, this week's economic data notched up investor
concerns another degree. The producer price index (PPI)
for July rose an unexpectedly strong 1%, vs. expectations
for a 0.6% increase. Excluding food and energy, the gain
was 0.4%, vs. expectations of 0.1%. Inflationary pressures
should keep the FOMC in a rate-raising mode, and this
could potentially fuel an exit from stocks. The coming
week's key economic data include existing- and new-home
sales and durable goods orders, and in recent months these
data have shown that the economy is on a solid footing.
Another downer for the Nasdaq came from negative market
reaction to Cisco's (CSCO:Nasdaq) and Dell's (DELL:Nasdaq)
earnings releases last week. However, the index stabilized
midweek with positive reactions to Applied Materials'
(AMAT:Nasdaq) and Hewlett-Packard's (HPQ:NYSE) earnings
Tuesday evening. In addition, so far the Nasdaq pullback
has not dampened its weekly chart profile. A weekly close
below the five-week modified moving average at 2133 would
have signaled a pullback of 7.2% to my monthly value level
at 2060. If this correction ends, my models show that the
upside potential to the end of September is my quarterly
risky level at 2381. (A risky level is a price at which
investors are likely to reduce holdings, according to my
But even with a deeper correction, tech stocks are still
the place to be. My fundamental model shows that
technology is now 14.4% undervalued, with health care the
only other undervalued sector at 4.2%. All other sectors
are overvalued, with energy 9.7% overvalued after getting
the most investor attention for much of 2005.
Within the technology sector, I focus on computer
manufacturers, which are 28.5% undervalued vs. 27.2% last
week; semiconductors at 21.4% undervalued vs. 20.2% last
week; and software at 17.3% undervalued vs. 15.6% last
The benchmark Technology SPDR (XLK:Amex) ended the week
down 0.14%, while the S&P 500 was down 0.87%. Since its
inception April 4, the model portfolio is up 5.23%
(including cash) vs. a gain of 7.29% for the XLK and 400%
for the S&P 500.
The model portfolio's gain since its inception on the
dollars invested is 6.12%. Closed positions are up 12.23%.
To review my portfolio strategy, I am focusing on big-cap
technology leaders, turnaround stories and emerging
technologies within my focus industries -- computer
manufacturers, semiconductors and software.
Portfolio changes this week include booking a 9% profit on
one part of the QLogic (QLGC:Nasdaq) position, and
doubling the Gateway (GTW:NYSE) holding on weakness.
Presently, the model portfolio has 21 positions -- 19
longs and two shorts. To keep the number of positions
manageable, once the number of positions reaches 25, I
will close an older position whenever I find a better long
or short candidate.
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, $17.82, 600 shares, 8.06% 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 38.4% undervalued,
and I am reducing my price target to my quarterly risky
level at $21.30, which I expect shares to reach over the
next six months.
My thesis of increasing demand for broadband around the
globe keeps Cisco in a desirable spot as the leading
provider of products and services that are needed to
modernize Internet protocol. Cisco is focusing on
technologies such as voice-over-IP, security and wireless,
and success in this strategy appears likely in my
judgment. CEO John Chambers indicated in the recent
earnings conference call that the company is achieving the
No. 1 position in most of its advanced technologies, and
is gaining market share on top of that. Cisco is
experiencing well-balanced growth across all geographies,
consumer markets and product segments.
Gateway (GTW:NYSE, $3.17, 2,400 shares, 5.74%): I added
1,200 shares of Gateway on July 6 at $3.42 a share, and
another 1,200 shares at $3.18 on Aug. 16, for an average
cost basis of $3.30. The stock is 71.70% undervalued, and
my price target is my quarterly risky level at $5.59,
which I expect to be achieved over the next six months.
Although Gateway shares declined 22.6% on the negative
reaction to earnings from Monday's close of $3.89 to
Tuesday's low of $3.01, the model portfolio's full
position is down only 3.94%. Shares fell to my monthly and
quarterly value levels at $3.14 and $3.07, respectively,
making shares more than 70% undervalued and leading me to
double this position. Gateway remains one of my technology
turnaround stories: It is expanding its channels for
product distribution in Japan and in Staples stores in the
U.S., and the company is gaining larger information
technology deals for personal computers and related
equipment from organizations such as the U.S. Navy and the
University of Texas at San Antonio.
Integrated Device Technology (IDTI:Nasdaq, $10.60, 375
shares, 3.00%): I added 375 shares of IDT to the portfolio
at $10.42 on July 11. The shares are 49.3% undervalued,
and my price target is the stock's 52-week high at $21.25,
which I expect it to reach over the next six months.
IDT designs chips and chip sets that are used in various
processes in networking and communications, and the
company should benefit from the increase in information
technology spending expected over the next six months.
Cisco is one of its largest customers. This week,
Integrated Circuit Systems (ICST:Nasdaq) said that its
shareholder vote on IDT's proposed $1.7 billion cash and
stock acquisition offer will be Sept. 15. I believe this
deal makes sense as IDT hardware and software products for
network equipment meld well with ICS products, such as
those for digital multimedia.
Juniper Networks (JNPR:Nasdaq, $23.32, 175 shares, 3.08%):
I added 175 shares of Juniper to the portfolio at $23.70
on July 25, and my model shows Juniper 52.1% undervalued.
My price target is my quarterly risky level at $33.37,
which I expect the shares to reach over the next six
Like Cisco, Juniper will benefit from the overall increase
in demand expected to modernize the expanded use of
broadband. Given the dramatic increased demand, there is
room for both companies to resume a solid revenue growth
path. For example, Juniper cut a deal with Speakeasy this
week. The independent broadband service provider will be
deploying new Juniper routing platforms in its national
fiber-optic network to help small and midsized businesses
more easily adjust their systems as their bandwidth needs
Microsoft (MSFT:Nasdaq, $26.72, 150 shares, 3.02%): On
June 30, I added 150 shares of Microsoft at $25.06, and
the software maker is 13.4% undervalued. My price target
is my semiannual risky level at $35.20, which I expect
shares to reach over the next six months.
Although Microsoft is less undervalued than my other long
positions, it has many new products and services that will
be launched over the next six months or so, and the
prospects for the company returning to a growth mode are
quite exciting. When you consider adding a big-cap tech
stock as a portfolio long, you can allow that company to
be less undervalued given that it has tons of cash and now
offers a dividend to investors.
Newport (NEWP:Nasdaq, $13.32, 600 shares, 6.03%): I added
300 shares of Newport to the portfolio at $14.17 on July
11, and another 300 shares on July 29 at $13.17, for an
average cost basis of $13.67. Newport shares are 60.0%
undervalued, and my price target is my monthly risky level
at $15.41, which I expect the stock to reach over the next
Newport develops laser-based IT components, and these
specialty instruments and systems applications should
regain product sales over the next six months. The company
had what I believe to be a minor hiccup in sales in its
second quarter, but I expect a recovery given the recent
surveys calling for increased IT spending, particularly
after the terrorist attacks in London and Egypt in July.
Open Text (OTEX:Nasdaq, $12.06, 325 shares, 2.96%): I
added 325 shares of Open Text to the model portfolio on
July 26 at $12.24. The stock is 60.0% undervalued, and my
price target is my semiannual risky level at $18.34, which
I expect shares to achieve by the end of 2005.
This company develops and licenses software that allows
organizations to manage documents and content over
internal networks and the Internet. I expect regulatory
issues related to new requirements, like Sarbanes-Oxley,
and heightened security concerns to lead to an upgrade
cycle in this industry over the next six months or so.
QLogic (QLGC:Nasdaq, $33.46, 150 shares, 3.78%): The model
portfolio's original position of 150 shares was
established on May 11 at $29.39. Trades in two more lots
have yielded gains of 11% and, this week, 9.2%. QLogic is
21.4% undervalued, and my price target is my quarterly
risky level at $39.35, which the stock should reach over
the next six months.
QLogic designs storage-networking components with an eye
to security and stands to gain from increasing demand for
storage that also provides security features. QLogic has
recently won several "best of breed" industry awards for
product excellence, which also helps to spur demand for
its products, and this week the company shipped its
20,000th switch into the fast-growing blade server market.
Demand in that market is coming from customers who are
using fibre channel switches to make it easy to
consolidate servers and storage.
RSA Security (RSAS:Nasdaq, $12.50, 325 shares, 3.06%): I
added 325 shares of RSA to the portfolio at $12.21 on July
11. The company is 49.6% undervalued, and my price target
is the stock's quarterly risky level at $17.44, which I
expect the shares to reach over the next six months.
The trend toward increasing online security also favors
RSA Security, which develops products to secure the
identities of personnel using corporate networks and
services. Its software provides specific applications that
are important in the effort to prevent cyber-terrorism. A
survey released by RSA Security this week shows that --
despite fears of fraudulent activity and identity theft --
consumers are increasing the amount of personal business
they do online if their banks and online services offer
authentication. The study showed that more than 82% of
respondents were concerned about identity theft and online
fraud. Given these security concerns, products to enhance
protection against online fraud should see increased
Sun Microsystems (SUNW:Nasdaq, $3.60, 3,000 shares,
8.14%): 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 later this year of StorageTek
(STK:NYSE), which is 12.3% overvalued, Sun ended the week
Sun Micro is one of my technology turnaround stories, as
it is adding the products and services of StorageTek to
increase business in its primary target market ¿ data
centers around the world. StorageTek shareholders will
vote on the propsed merger Aug. 30. Additionally, Sun is
making it easier for software developers to use its
software by opening up its source code, which should
increase demand for its services and open the door for
cooperative services with other IT vendors to provide
services to common customers.
Time Warner (TWX:NYSE, $18.08, 450 shares, 6.13%): 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 31.7% undervalued, and my price target is the
stock's fair value at $25.84, which I expect it to reach
within the next six months.
The turnaround of the America Online business is my major
focus in choosing Time Warner as a portfolio member. Time
Warner's cable TV business is doing quite well, while its
other businesses have been steady. The new portal AOL.com
should compete well for advertising dollars in future
quarters, and efforts by investor Carl Icahn to increase
shareholder value could accelerate this process, as there
are other potential hedge funds and large investors that
may join in. CEO Dick Parsons and Icahn met this week, and
both agreed that Time Warner shares are undervalued. The
billionaire investor has been advocating the breakup of
Time Warner, including a full spinoff of the cable
company's television properties.
VeriSign (VRSN:Nasdaq, $24.09, 150 shares, 2.72%): This
150-share position was added to the portfolio at $24.06 on
July 21. The stock is 35.3% undervalued, and my price
target is my quarterly risky level at $31.97, a price I
expect the stock to achieve over the next six months.
This position is another play on securing the Internet.
VeriSign's networking products and services help to secure
transactions over network connections to the Web. This
week the company announced trials of its IP connection
services at three universities: University of Michigan,
Northwestern University and Texas A&M. VeriSign's service
allows cellular handsets to become IP devices when near a
Wi-Fi signal, giving users the ability to make VoIP calls.
Xilinx (XLNX:Nasdaq, $26.96, 150 shares, 3.05%): This 150-
share position was added to the portfolio at $26.52 on
June 20, and the stock is 33.5% undervalued. My price
target is my monthly risky level at $30.85, a price I
expect the stock to achieve over the next six months.
Xilinx provides integrated circuits and semiconductors to
both the general commercial manufacturers and for specific
consumer products. A strong holiday season for electronics
should drive demand for the company's chips. Inventories
are well-contained with some shortages noted and a strong
holiday season is projected, particularly if energy prices
Zygo (ZIGO:Nasdaq, $11.25, 400 shares, 3.39%): I added 400
shares of Zygo at $10.60 on July 11. The company is 57.1%
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, a supplier of optical metrology instruments and
precision optics used in making semiconductor capital
equipment, is scheduled to report fiscal 2005 fourth-
quarter results of 17 cents a share after the close
Thursday, Aug. 25. This past week, Applied Materials
raised its guidance in its quarterly report, which could
be an indication that business is picking up at Zygo. With
the increased demand for chips, the companies involved
with making the chip-manufacturing equipment should be the
next segment to benefit.
EMC (EMC:NYSE, $13.17, 300 shares, 2.98%): EMC, an early
entry in the model portfolio that was traded for a 15%
gain, rejoined the model portfolio at $13.75 on June 29.
The shares are now 61.4% undervalued, and my price target
is my monthly risky level at $15.15, a price I expect EMC
to reach over the next six months.
EMC, the leading provider of storage systems, has recently
begun to expand its business to offer a more complete
array of IT products and services, including networking
gear and servers. Expanding by growth into other IT areas
makes sense for the leader in storage, and this week the
company made two small acquisitions. The first is
privately held Rainfinity, which produces software to
consolidate information from multiple network storage
locations; the second is Maranti Networks, which makes
network storage switches.
Intel (INTC:Nasdaq, $25.65, 475 shares, 9.19%): 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 24.5% undervalued, and my price
target is my quarterly risky level at $30.98, which I
expect the stock to reach in the next six months.
What can I say other than "Intel Inside"? This means to me
that Intel belongs inside every long-term technology stock
portfolio. The company is building plants and production
facilities in the major emerging economic regions such as
India and China; it will be providing chips to Apple
Computer (AAPL:Nasdaq) in a year or so; and if WiMax takes
off in the next year or so, Intel will benefit. (WiMax
extends Wi-Fi's range from several hundred feet to around
10 miles.) One sour note in this scenario, Advanced Micro
Devices' (AMD:NYSE) lawsuit against Intel, looks like just
an annoyance, particularly given AMD's recent positive
guidance. How can AMD complain about antitrust issues when
they are maintaining -- or in some product segments,
increasing -- market share?
SBC Communications (SBC:NYSE, $24.14, 170 shares, 3.09%):
I added 170 shares of SBC to the portfolio at $23.70 on
July 11. The company is 25.1% undervalued, and my
quarterly risky level is at $29.22, which I expect the
stock to reach over the next six months.
In my judgment, SBC is the best of the major telecom
providers: It owns a portion of the largest wireless
company, Cingular, in a partnership with BellSouth
(BLS:NYSE); it will soon be the owner of what's left of
AT&T (T:NYSE), its former parent; and it has several IT
products to help large and small businesses manage
information and their Internet needs. This week, New
Jersey regulators approved the acquisition of AT&T by SBC
after SBC said it would keep several AT&T facilities in
the state. The companies expect to complete the
transaction by late 2005 or early 2006.
Sirius Satellite Radio (SIRI:Nasdaq, $6.44, 1,000 shares,
4.86%): I added this position to the model portfolio at
$4.81 on April 28. Sirius is 33.6% undervalued, and my
price target is my monthly risky level at $8.04, which I
expect the stock to achieve over the next six months.
Satellite radio is one of the most important emerging
technologies of the past 20 years, as its growth potential
in becoming a fixture in automobiles and homes is similar
to the introduction of television. I also like XM
Satellite Radio (XMSR:Nasdaq), but choose Sirius over XM
because of Sirius' lead in content and the fact that it
has been more undervalued. Another plus for Sirius is that
it will be factory-installed in most 2006 model Ford
Symantec (SYMC:Nasdaq, $21.20, 400 shares, 6.39%): I added
225 shares of Symantec at $18.31 on May 11, and another
175 shares on July 29 at $22.10, for an average cost basis
of $19.97. Symantec is 29.8% undervalued, and my price
target is my annual risky level at $25.53, which I expect
the stock to achieve over the next six months.
The merger between Symantec and Veritas was successfully
completed in July, and the integration of their software
and storage products should make the combined company a
leader in the Internet software and services industry. A
new email security and availability product combines
antivirus and antispam services from Symantec with
Veritas' archiving and data backup technology. Symantec is
also acquiring Sygate Technologies, a provider of
compliance software solutions, to enhance its product
offerings in security and compliance applications.
Nasdaq 100 Unit Trust (QQQQ:Nasdaq, $38.82, (200) shares,
5.85%): On Aug. 10, I added a short position of 200 shares
of the QQQQ at $37.34. This position is a hedge just in
case the Nasdaq correction deepens in the weeks ahead.
My price target to cover is my monthly value level at
$36.44, which my model suggests is the risk given a
correction over the next three to five weeks. I set a buy-
stop at the QQQQ's recent 52-week high at $40.50.
Semiconductor HOLDRs (SMH:Amex, $36.24, (200) shares,
5.47%): I added a short position of 200 shares of SMH at
$37.13 on Aug. 9. If the correction on the Nasdaq deepens,
semiconductors -- which led the index during its rally --
will likely correct somewhat more than the Nasdaq. This
week's high on the Philadelphia Semiconductor index (SOX),
at 469.86, was well below the week's risky level at
$480.43. A weekly close below the five-week modified
moving average at 454.76 would signal a deeper correction
in the semis, with risk to my monthly value level at
My price target to cover this position is $34.12, which is
my monthly value level. Given a market correction, my
models suggest that this level will be achieved over the
next three to five weeks. My buy stop is the exchange-
traded fund's recent 52-week high at $38.50.
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.
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