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Technology Report Weekly Roundup

BY Richard Suttmeier | 08/26/05 - 05:41 PM EDT
Stocks in Focus: CSCO, GTW, JNPR, OTEX, QLGC, RSAS, SUNW, VRSN, EMC, INTC, SBC, SIRI, QQQQ

The Nasdaq slipped this week on higher crude oil prices, and the index looks weary with Labor Day only a week from Monday. At midweek, the index tried to stabilize but to no avail as crude oil moved to a new all-time high at $68 per barrel. The Nasdaq dipped below the 2133 level, which I had thought would be the low end of its trading range, with the upper end at its four-year high of 2219, set Aug. 23.

The entire stock market is now nervous, but the tech-heavy Nasdaq is holding up better than some of the other averages. For instance, the Dow's monthly chart profile will shift to negative on a close for August below its five-month modified moving average (MMA) at 10,445. But the Nasdaq can drop to 2060 on Aug. 31 and still maintain a positive monthly chart profile. Today's close below the five-week MMA at 10,545 Dow and 2133 Nasdaq shifts both weekly chart profiles to negative and indicates risk to 2060 on the Nasdaq. A fall to that level would extend the Nazz correction to 7.2%, and reduce the rally off its April 29 low from 17.4% to 12.6%.

Meanwhile, the Philadelphia Semiconductor index (SOX) -- which led the market higher during the recent rally -- has been holding up better than the Nasdaq. The SOX's weekly chart profile is neutral, as this week's close was above its five-week MMA at 456.16. Keep in mind that this moving average remains well above the 200-week simple moving average at 424.91, which is a longer-term positive and supports my buy-on-weakness strategy for tech stocks. But to provide some protection against further downside, the model portfolio holds shorts in the Nasdaq 100 Shares (QQQQ:Nasdaq) and the Semiconductor HLDRs (SMH:Amex), which will be covered on weakness to 2060 on the Nasdaq and 437.03 on the SOX.

Mixed economic news also bruised the market this week. Weaker-than-expected existing-home sales were more than offset by another new record for new-home sales, but durable goods orders were weaker than expected. In my judgment, this indicates that higher crude oil prices are taking a bite out of consumer demand. Indeed, I have mentioned in prior summaries that I believe crude oil's breakout above $62 was one of the factors that stymied the Nasdaq at 2219. Next week, the economic calendar is packed with several potential market-moving releases, including factory orders, consumer confidence, personal income, the ISM Index and, on Friday, the employment data for August.

Another significant event next week is the end of August. Wednesday's monthly closes, which are inputs to my model, will generate new monthly value and risky levels for the 21 members in the model portfolio, as well as for every other stock and all U.S. capital markets. I am particularly interested in monthly value levels at which to add to portfolio positions that remain at least 20% undervalued, including Cisco Systems (CSCO:Nasdaq), EMC (EMC:NYSE) and Intel (INTC:Nasdaq), as I talked about in alerts sent out on Monday and Tuesday. (A value level is a price at which buying should occur on weakness; a risky level is a price at which selling should occur on strength.)

My fundamental model shows technology 14.3% undervalued, the only sector that's more than 5% undervalued. The only sector to be more than 5% overvalued is energy at 11.5%. Within the technology sector, computer manufacturers are 29.2% undervalued, vs. 28.5% last week; semiconductors are 21.6% undervalued, vs. 21.4% last week; and software is 15.2% undervalued, vs. 17.3% last week.

The benchmark Technology SPDR (XLK:Amex) ended the week down 0.67%, while the S&P 500 was down 1.20%. Since its inception April 4, the model portfolio is up 4.79% (including cash) vs. a gain of 6.46% for the XLK and 2.75% for the S&P 500.

The model portfolio's gain since its inception on the dollars invested is 5.52%. Closed positions are up 12.50%. 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.

I made two portfolio moves this week, using weakness in VeriSign (VRSN:Nasdaq) on Wednesday to double that position and lower its cost basis with the stock more than 40% undervalued vs. its fair value. If Wall Street analysts had lowered their forward 12-month EPS estimates - - a factor in my fair value computation -- fair value would have also dropped, but no change looks forthcoming in the estimates. So VeriSign's lower price justified this addition at its $21.58 monthly value level. Also, I removed Zygo (ZIGO:Nasdaq) for an 18% gain when shares spiked Friday morning following the company's better-than- expected earnings report Thursday evening.

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

Cisco (CSCO:Nasdaq, $17.40, 600 shares, 8.05% 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.

As an example of the global demand for broadband, which is a major component of my technology leadership theme, a headline in the Sunday New York Post read: "Search Engines Explode Abroad." According to the Internet World Stats Web site, global Internet use has grown tremendously between 2000 and 2005: It's up 183% in Asia; 277% in Latin America and the Caribbean; and 312% in the Middle East. Only 15% of the population within these emerging regions has Internet access, which makes this growth all the more significant. The growing need for broadband keeps Cisco's telecom equipment business, with products such as new routers to modernize Internet protocol, in the sweet spot. Cisco is 39.4% undervalued, which justifies adding to positions as value levels are tested on weakness. My price target is my quarterly risky level at $21.30, which I expect shares to reach over the next six months.

EMC (EMC:NYSE, $13.00, 300 shares, 3.01%): 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 company is expanding its business beyond storage systems to include a complete array of IT products and services, including networking gear and servers, and this business strategy should be successful. The shares are now 62.7% 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.

Gateway (GTW:NYSE, $2.93, 2,400 shares, 5.43%): 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. Gateway remains one of my technology turnaround stories, and this position will require patience if shares continue to decline. Gateway has expanded its retail strategy with deals in Japan and with Staples stores in the U.S. In addition, the company has been establishing distribution deals with organizations such the U.S. Navy and the University of Texas at San Antonio. The stock is 73.1% undervalued, and my price target is my quarterly risky level at $5.59, which I expect to be achieved over the next six months.

Integrated Device Technology (IDTI:Nasdaq, $10.51, 375 shares, 3.04%): I added 375 shares of IDT to the portfolio at $10.42 on July 11. Once the merger between IDT and Integrated Circuit Systems (ICS:NYSE) is complete later this fall, the combination will create a specialty chipmaker for communications gear, computers and electronic devices. The combined company will have a more diversified product mix, making it able to better compete in the industry. IDT's shares are 49.1% 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.

Intel (INTC:Nasdaq, $25.41, 475 shares, 9.31%): 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.

Research In Motion (RIMM:Nasdaq) announced that it has agreed to a joint development deal with Intel. Reports circulated that the deal involves RIM using Intel's chips in upcoming products, while Intel would use RIM's battery- saving technology. I will keep readers informed of any developments in this agreement, as it seems logical that it would involve WiMAX, a version of Wi-Fi that provides an extended range. WiMAX is one of the growth areas Intel is depending on in 2006 and beyond, and it should bring broadband to areas not wired for cable or DSL. Intel is 26.1% undervalued, which justifies adding to positions as value levels are tested on weakness. My price target is my quarterly risky level at $30.98, which I expect the stock to reach in the next six months.

Juniper Networks (JNPR:Nasdaq, $22.97, 175 shares, 3.10%): I added 175 shares of Juniper to the portfolio at $23.70 on July 25. Juniper, which makes routers for broadband networks, is another company that will benefit from the expected increase in demand for broadband and the modernization of networks. My model shows Juniper 52.5% undervalued, and my price target is my quarterly risky level at $33.37, which I expect the shares to reach over the next six months.

Newport (NEWP:Nasdaq, $13.00, 600 shares, 6.02%): I added 300 shares of Newport to the model 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 sells laser-based information technology (IT) components, and although the company reported a sales decline in its second quarter, it should regain orders through 2006 as organizations upgrade and increase security features on their networks. Newport shares are 61.3% undervalued, and my price target is my monthly risky level at $15.41, which I expect the stock to reach over the next six months.

Open Text (OTEX:Nasdaq, $11.85, 325 shares, 2.97%): I added 325 shares of Open Text to the model portfolio on July 26 at $12.24. This company licenses software that helps manage documents and content over networks and the Internet. Regulatory issues, like Sarbanes-Oxley, and heightened security concerns should continue an upgrade cycle for software well into 2006. The stock is 59.9% undervalued, and my price target is my semiannual risky level at $18.34, which I expect shares to achieve within the next six months.

RSA Security (RSAS:Nasdaq, $12.69, 325 shares, 3.18%): I added 325 shares of RSA to the portfolio at $12.21 on July 11. This company develops products to secure the identities of personnel using corporate networks and services, and its software includes specific applications that are important in the effort to combat cyber- terrorism. Like broadband, security concerns are another growth area that looks promising for investors. The stock is 48.7% 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.

Sun Microsystems (SUNW:Nasdaq, $3.67, 3,000 shares, 8.49%): 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. Sun Micro is another technology turnaround story, which will be helped by the incorporation of StorageTek's (STK:NYSE) products and services. StorageTek's shareholders vote on the proposed merger Aug. 30.

Sun's target market is data centers around the world, and as part of its turnaround strategy, the company has made it easier for software developers to use its software by opening up access to its source code. This should increase the demand for Sun's products and services as organizations become familiar with the capabilities of its software. For major clients that use products from more than one IT vendor, open source code allows these companies to develop cooperative applications for common customers. Sun is 43.3% undervalued, and my price target is the 52-week high at $5.65, which I expect the stock to reach in the next six months.

Time Warner (TWX:NYSE, $17.56, 450 shares, 6.10%): 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. This is another turnaround story, which is focused on Time Warner's America Online division. I expect the new AOL.com portal to compete well for advertising dollars, and the division is looking at ways to shift its dial-up subscribers to broadband and add new high-speed subscribers. After activist investor Carl Icahn recently began advocating the breakup of Time Warner, including a full spinoff of the cable company's television properties and possibly AOL, CEO Dick Parsons and the billionaire met and agreed that Time Warner shares are undervalued -- and say that they plan to meet again. This could also spur more value for shareholders. Time Warner is 34.5% 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.

VeriSign (VRSN:Nasdaq, $21.34, 300 shares, 4.94%): This 150-share position was added to the portfolio at $24.06 on July 21. This week I added another 150 shares at my monthly value level of $21.58, giving me an average price of $22.82. VeriSign's networking products help provide secure transactions over network connections to the Web -- an area that I expect to grow because of the increased demand for broadband and security fears. The stock is 44.8% 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.

Xilinx (XLNX:Nasdaq, $26.87, 150 shares, 3.11%): This 150- share position was added to the portfolio at $26.52 on June 20. Xilinx provides integrated circuits and semiconductors that are used in commercial manufacturing and in specific consumer products. A strong holiday season for electronics should drive demand for the company's chips and lead to more upside. Xilinx is 32.9% undervalued, and my price target is my monthly risky level at $30.85, a price I expect the stock to achieve over the next six months.

TWOS

Microsoft (MSFT:Nasdaq, $26.97, 150 shares, 3.12%): On June 30, I added 150 shares of Microsoft at $25.06. The behemoth software maker has many new products and services in its pipeline that will be released over the next six months or so, including xBox and Windows Vista, plus the company has tons of cash and now offers a dividend. Microsoft is 13.4% undervalued, and my price target is my semiannual risky level at $35.20, which I expect shares to reach over the next six months.

QLogic (QLGC:Nasdaq, $34.87, 150 shares, 4.04%): The model portfolio's original position of 150 shares was established on May 11 at $29.39. QLogic designs storage- networking components, and should benefit from increasing demand for storage that includes upgraded security features. The company is 17.5% undervalued, and my price target is my quarterly risky level at $39.39, which the stock should reach over the next six months.

SBC Communications (SBC:NYSE, $23.71, 170 shares, 3.11%): I added 170 shares of SBC to the portfolio at $23.70 on July 11. SBC is position in one of the best areas of business among the major telecom providers: It owns wireless carrier Cingular in a partnership with BellSouth (BLS:NYSE); it is completing the purchase 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. The AT&T-SBC merger should be completed by late 2005 or early 2006. The company is 26.2% undervalued, and my quarterly risky level is at $29.22, which I expect the stock to reach over the next six months.

Sirius Satellite Radio (SIRI:Nasdaq, $6.70, 1,000 shares, 5.17%): I added this position to the model portfolio at $4.81 on April 28. Satellite radio has the potential to become a fixture in most automobiles and homes, and indeed Sirius radios will be factory-installed in most 2006 model Ford vehicles. Although I also like XM Satellite Radio (XMSR:Nasdaq), I choose Sirius over XM because of Sirius' lead in content, and my model shows that Sirius is more undervalued. The stock is 33.2% undervalued, and my price target is my monthly risky level at $8.04, which I expect the shares to achieve over the next six months.

Symantec (SYMC:Nasdaq, $20.33, 400 shares, 6.27%): 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. The integration of Symantec and Veritas combines some of the best software and storage products available, which should make this company a leader in the Internet software and services industry. Symantec is 34.5% 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.

THREES

Nasdaq 100 Unit Trust (QQQQ:Nasdaq, $38.46, (200) shares, 5.93%): On Aug. 10, I added a short position of 200 QQQQ shares at $37.34. This position is a hedge 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. My buy-stop is the QQQQ's recent 52-week high at $40.50.

Semiconductor HOLDRs (SMH:Amex, $36.29, (200) shares, 5.60%): I added a short position of 200 shares of SMH at $37.13 on Aug. 9. If the Nasdaq correction intensifies, semiconductors -- which led the index during its rally -- will likely correct somewhat more than the Nasdaq. 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.

Regards,

Richard Suttmeier

Stay Tuned for Monthly Report

The final edition will be sent out Wednesday morning.

02/28/06 - 12:39 PM EST
Making Adjustments
Stocks in Focus: CSCO, EMC, INTC, TWX

Booking profits in one position and trimming three others.

02/24/06 - 11:07 AM EST
Removing a Hedge
Stocks in Focus: SMH

Suttmeier's closing this protective position, which is no longer necessary.

02/23/06 - 10:11 AM EST
Technology Report Weekly Roundup
Stocks in Focus: CSCO, DELL, EMC, INTC, JNPR, QQQQ, SMH, SYMC, T, TWX, XMSR

The market's resilience continues as almost all sectors remain overvalued.

02/24/06 - 06:17 PM EST

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