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.
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
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
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
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.
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.
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.
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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After the Bell
Before the Bell
Jim Cramer's Daily Booyah
Winners & Losers