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TheStreet Open House

The Real Story: Blister in the Sun Microsystems

Despite having the equivalent of a hold rating on Sun, the analyst believes there are some positives: "It appears clear that Sun is in a better product and cost position than it has been in the past few years, which seems to suggest that some kind of financial recovery lies ahead."

However, Hunt, like most of his contemporaries, wants to see more proof that Sun has turned things around before recommending the stock.

As I've stated before, the sell side is often reluctant to stick its neck out. The buy side on the other hand is always in search of market-beating returns and is more inclined to take risks, albeit calculated ones. Institutions don't often take big positions without doing their own research. When firms such as Dodge & Cox back up the truck on a beaten-down stock like Sun, it pays to take notice.

Based on the aforementioned institutional interest, chart watchers shouldn't be surprised that Sun is showing some technical improvement.

The four-year weekly chart of Sun below shows the stock has engaged in similar behavior three times since bottoming in 2002. The stock formed a base below $4 and then rallied up to roughly $6 on increasing volume before falling back to previous levels. Beginning in late 2005, Sun once again emerged from a base on stronger volume. The most recent base was longer than the others and could indicate this rally will be sustainable.

It's hard to say where the institutions that have been buyers would start cashing in. But I believe Martorelli's $6 price target is a good one, especially taking the technicals into consideration. And should Sun start to make real progress in turning its business around, the sell siders will pile on with upgrades, which should boost the stock even more.

Is it risky to own a stock of a company that has yet to prove it can return its business to profitability? Absolutely. But I like following smart investors -- more especially when they find value in stocks at which the rest of the Street thumbs its collective nose.

The Sun Also Rises
Value investors' buying reflected in Sun Micro's chart
Click here for larger image.
Source: StockCharts.com

As originally published, this story contained an error. Please see Corrections and Clarifications.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.

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