Low-Cost Tech Stocks: Options on Survival

When you look to buy a tech stock trading between $1 and $3, you have to be clear that you're buying shares in a potential bankruptcy. Stocks in this category are option plays on survival, and you should buy them only if you can afford to lose 100% of your money, as stocks become worthless at bankruptcy.

Keep in mind that if you buy a stock option, that option expires worthless at its expiration date. In the case of buying a stock trading under three bucks, there is no expiration date, but it is worthless on bankruptcy, so the price you pay is the premium.

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.

This is an environment where some speculation on low-priced technology stocks should be considered, and I highlight three potential survivors below.

Demand for upgrades in broadband and related Internet protocol applications should help Lucent and Ciena survive. Increased demand for secure management software, on modernized networks, should help Actuate.

Here are my screenings for these three potential survivors. One note: I am providing a "buy zone" for each without upside price targets. A rule of thumb is to book 50% of the gain if the stock doubles and keep the balance of the position, hoping for the stock to return to its fair value.

Lucent Technologies, by my models, is 73.4% undervalued, making its fair value $10.98. The weekly chart profile is neutral, suggesting the stock is in a trading range. The low end of the range should be between my weekly value pivots at $2.76 and $2.92. (A value pivot is a value level that did not hold on weakness and is now acting as a magnet as buyers and sellers battle for control; a value level is a price at which my models project that buyers will emerge.)

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