Technology Report Weekly Roundup

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Investors who sold in May and went away for the summer missed one of the more powerful three-month technology rallies of the new millennium. There has been no summer doldrums for the Nasdaq, and even after a 16% gain since the end of April, the tech-heavy average could hit 2381 by Labor Day.

With the test of 2201 this morning, the Nasdaq is up more than 300 points since the April 29 low of 1890, and a move to my quarterly risky level at 2381 tacks on another 8.5%. (A risky level is where my models project sellers will re- emerge.) Stronger-than-expected economic data and lower- than-expected inflation numbers have provided a positive fundamental backdrop in an environment of volatile energy costs, higher interest rates and the renewed threat of terrorist attacks.

Statistically, the Nasdaq is right back where it started the year. Semiconductor stocks have been the market leaders since late April, with the Philadelphia Semiconductor Index (SOX) up 27.5% from its low of 376.64 on April 29 to the high of 480.30 on July 22.

So far, tech earnings this quarter have been quite good, with guidance overall suggesting that information technology (IT) spending is on the rise. Demand for semiconductors -- the nuts and bolts of technology -- is on the rise. Broadband demand around the world is picking up, which will require Internet protocol (IP) upgrades. The recent terrorist bombings in London and Egypt should lead to an IT upgrade cycle, including new products and software to help prevent cyber-terrorism -- and the U.S. Homeland Security Department has set this goal as a priority. The demand for cell phones, PCs and laptops with Internet connectivity is growing, with industry surveys showing demand for computers up 15% to 16% for the second quarter year over year.

Several portfolio members reported earnings this week, including: Texas Instruments (TXN:NYSE), Sun Microsystems (SUNW:Nasdaq), Integrated Device Technology (IDTI:Nasdaq), Gateway (GTW:NYSE), Newport (NEWP:Nasdaq), and Symantec (SYMC:Nasdaq). Results were generally positive. More details are provided below in the stock portion of the Weekly Summary. Coming next week, Sirius Satellite Radio (SIRI:Nasdaq) reports on Tuesday, followed by Time Warner (TWX:NYSE) on Wednesday.

This week's stronger-than-expected economic data for housing and durable goods orders, and the Federal Reserve's beige book, prepared for the Aug. 9 FOMC meeting, show the economy expanding at a solid pace. This morning's release of GDP for the second quarter of 2005 and the Chicago purchasing managers' index (PMI) support my view that the economy remains robust, with IT as a driving force. The key economic data for next week include the ISM Index, personal income, factory orders and employment figures for July. In recent months, solid economic data overall have provided the background for my positive outlook on technology stocks.

My fundamental models show the technology sector 13.0% undervalued vs. 14.2% last week; no other sectors are undervalued by 5% or more. Health care is the only other undervalued sector, but by only 2.8%. Four sectors are now more than 5% overvalued: basic industries, by 5.1%; consumer nondurables, 6.2%; energy, 12.3%; and public utilities, 6.7%. These valuations suggest that a rotation into technology remains a desired investment strategy.

Computer manufacturers ended the week 25.0% undervalued vs. 24.4% last week; semiconductors ended the week 19.0% undervalued vs. 18.8% last week; and software was 16.7% undervalued vs. 17.9% last week.

The benchmark Technology SPDR (XLK:Amex) ended the week down 0.5%, while the S&P 500 was up 0.1%. Since its inception April 4, the model portfolio is up 6.74% (including cash) vs. a gain of 8.79% for the XLK and 5.23% for the S&P 500.

The model portfolio's gain since its inception on the dollars invested is 8.65%. Of 19 open positions, five are outperforming the XLK, with three of these showing double- digit gains.

This week I established two new model portfolio positions, Juniper Networks (JNPR:Nasdaq) and Open Text (OTEX:Nasdaq). Also, I booked a 40.7% profit in Texas Instruments on Tuesday morning, following the company's upbeat earnings report after the close Monday. Last, I built up two positions -- Newport and Symantec -- on weakness Friday after their Thursday earnings reports.

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, $19.15, 600 shares, 9.41% 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 33.3% undervalued. My price target is the stock's fair value at $28.95, which I expect the stock to reach in the second half of 2005.

Cisco will acquire privately held Sheer Networks, which develops intelligent network and service management products for large organizations. This continues Cisco's long-term strategy of growing through acquisitions. The benefit for Cisco is that Sheer provides advanced networking applications that configure with Cisco's next- generation management platform for products targeted to Service Provider customers. In a separate deal, Motorola (MOT:NYSE) and Cisco are teaming up to design a cell phone that can swap phone calls between cellular networks and office networks using the short-range wireless technology known as Wi-Fi.

When Cisco reports earnings on Aug. 9, I will be looking for double-digit sales growth for networking sales, and accelerating demand for IP telephony, and security and storage solutions.

Gateway (GTW:NYSE, $3.98, 1,200 shares, 3.91%): I added 1,200 shares of Gateway on July 6 at $3.42 a share. The company is 66.8% undervalued. My price target is $6.70, below the 52-week high at $6.92, as I expect the stock to rebound to 50% of its fair value at $13.38.

Gateway was scheduled to report earnings on July 28, but delayed the release until Aug. 4 as the company is waiting for final guidance from the Securities and Exchange Commission on how it should account for an April agreement with Microsoft (MSFT:Nasdaq). Gateway and Microsoft agreed to a $150 million deal April 11 to work together on marketing and developing Gateway PC products as part of a legal settlement. The EPS consensus estimate is 2 cents.

Integrated Device Technology (IDTI:Nasdaq $11.56, 375 shares, 3.55%): I added 375 shares of IDT to the portfolio at $10.42 on July 11. IDT shares are 42.7% undervalued. My price target is the 52-week high at $21.25, which I expect shares to reach in the second half of 2005.

On Wednesday, Integrated Device, which makes chips used in networking equipment, reported a small rise in profits that was in line with its recently lowered outlook. Net EPS for the quarter was 6 cents, beating the consensus by a penny.

Juniper Networks (JNPR:Nasdaq, $23.99, 175 shares, 3.44%): I added 175 shares of Juniper to the portfolio at $23.70 on July 25. My model shows Juniper 55.7% undervalued. My price target is $28.00, which is 50% of the stock's fair value price of $55.90. I expect the shares to reach this price target in the second half of 2005.

Juniper makes routers and other equipment that are needed to upgrade Internet protocol networks, putting it in a sweet spot as demand for broadband increases. Last week, the company reported EPS that beat the consensus and projected strong demand for its routers, but the stock declined as some analysts thought the guidance was less than expected. This gave me a favorable price at which to add shares to the model portfolio this week.

Microsoft (MSFT:Nasdaq, $25.61, 150 shares, 3.15%): On June 30, I added 150 shares of Microsoft at $25.06. The software maker is 16.6 undervalued. My price target is $31.93, which is the stock's fair value and a price I expect the stock to achieve in the second half of 2005.

On Thursday, Microsoft told analysts and investors that the company is back on track to increase market share with several initiatives that will begin in the second half of the year. The software giant's new product pipeline for the next year will be double that of the past three years, according to CEO Steve Ballmer. The firm expects 5% to 6% revenue growth in fiscal 2006, with revenue in the $12.85 billion to $12.97 billion range.

Newport (NEWP:Nasdaq, $13.70, 600 shares, 6.73%): I added 300 shares of Newport to the portfolio at $14.17 on July 11, and another 300 shares on Friday at $13.17 for an average cost basis of $13.67. Newport shares are 54.3% undervalued, and my price target is my monthly risky level at $15.41, which I expect the stock to reach in the second half of the year.

In its earnings report Thursday, Newport said second- quarter sales were $97.5 million, slightly higher than first-quarter sales of $97.0 million. The company focused on its book-to-bill ratio that was above 1.0 for the fifth consecutive quarter, meaning that orders received exceeded orders shipped.

Open Text (OTEX:Nasdaq, $12.01, 325 shares, 3.20%): I added 325 shares of Open Text to the model portfolio on July 26 at $12.24. The stock is 59.8% undervalued, and my price target is my monthly risky level at $14.83, which I expect shares to achieve by the end of 2005.

Open Text develops software to manage content that's sent over the Internet. Given the increased need to secure networks in the wake of the recent terrorist attacks, upgrades to network software should be a growth area in the second half of the year.

QLogic (QLGC:Nasdaq, 31.05, 275 shares, 6.99%): The model portfolio's original position of 150 shares was established on May 11 at $29.39. Last week, I traded a second lot of 125 shares for a gain of 11%, and then added the shares back on July 21 at $31.10. QLogic is 28.3% undervalued, and my price target is my monthly risky level at $38.50, which the stock should reach in the second half of 2005.

QLogic announced this week that it will be providing host bus adapters (HBA) to be used in IBM BladeCenter servers. The industry's first iSCSI blade server platform will deliver a high-performance storage networking solution while simplifying networking and making it more efficient.

RSA Security (RSAS:Nasdaq, $12.95, 325 shares, 3.45%): I added 325 shares of RSA to the portfolio at $12.21 on July 11. It is 52.2% undervalued, and my price target is the stock's 52-week high of $23.91, which I expect the company to achieve in the second half of 2005.

The company will review its strategy and financial results on Monday at the Annual America's Growth Capital Growth Conference. You can tune into a Webcast of the live presentation at 10 a.m. on RSA's site, http://www.rsasecurity.com.

Sun Microsystems (SUNW:Nasdaq, $3.84, 3,000 shares, 9.44%): 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 of StorageTek (STK:NYSE), which is 14.1% overvalued, Sun ended the week 33.0% undervalued.

Sun Micro reported a profit in its fiscal fourth quarter on Tuesday, and indicated that demand for its products and services has stabilized. The company is on track for a very successful 2006, according to CEO Scott McNealy. Sun reported EPS of 6 cents, well above the 1-cent consensus estimate. Then on Wednesday, the company announced that it had signed a deal to provide Sun's Java Enterprise Systems and Sun's Solaris 10 operating systems to General Motors (GM:NYSE).

Time Warner (TWX:NYSE, $17.02, 450 shares, 6.27%): 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 33.2% undervalued. My price target is $27.25, the stock's fair value, which I expect it to reach in the second half of 2005.

In news this week, America Online and ABC News agreed to continue and augment their content deal, putting another piece in place for AOL's new portal. Subscribers of AOL won't miss a beat in their ABC News Now broadcasts, which are already available on the service. Content remains a key ingredient to the division's turnaround.

VeriSign (VRSN:Nasdaq, $26.31, 150 shares, 3.23%): This 150-share position was added to the portfolio at $24.06 on July 21. The stock is 30.7% undervalued with a fair value of $49.29. My price target is my quarterly risky level at $29.97, a price I expect the stock to achieve in the second half of the year.

Xilinx (XLNX:Nasdaq, $28.36, 150 shares, 3.48%): This 150- share position was added to the portfolio at $26.52 on June 20. The stock is 28.4% undervalued with a fair value of $43.55. My price target is my monthly risky level at $28.85, a price I expect the stock to achieve in the second half of the year.

In a CNBC interview on Wednesday, Xilinx CEO Willem Roelandts indicated that the semiconductor industry was improving and that there are some product shortages among chipmakers. The CEO said that revenue at Xilinx is split 50/50 between capital goods products, such as networking and switch equipment, and the consumer products market, which includes specialized chips for computers and other electronic devices. He projected slow but steady growth ahead for the industry and Xilinx.

Zygo (ZIGO:Nasdaq, $11.07, 400 shares, 3.63%): I added 400 shares of Zygo at $10.60 on July 11. The company is 60.0% 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.

TWOS

EMC (EMC:NYSE, $13.69, 300 shares, 3.36%): EMC rejoined the model portfolio at $13.75 on June 29, and shares are now 58.2% undervalued. My price target is $15, near the stock's 52-week high at $15.09 and a price I expect EMC to reach in the second half of 2005.

On Monday, EMC announced the release of its largest, new high-end storage system. The Symmetrix DMX-3 gives customers tiered storage in a single system, and users can add processing power by installing additional processor cards. Demand is expected from customers looking to replace existing storage platforms with this single system. Shipments of the system will begin in September.

Intel (INTC:Nasdaq, $27.14, 475 shares, 10.56%): 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 18.8% undervalued. My price target is my quarterly risky level at $30.98, which I expect the stock to reach in the second half of 2005.

Intel said this week that it is spending $3 billion to build a factory in Arizona and another $105 million to convert an inactive plant in New Mexico to a temporary test facility to meet growing demand for computer chips. This initiative will create up to 1,000 new Intel jobs over the next several years, and the company is expected to hire 3,000 people during construction. Recently, officials in Israel and India have indicated that Intel is also planning to build factories or other facilities in their countries.

SBC Communications (SBC:NYSE, $24.45, 170 shares, 3.40%): I added 170 shares of SBC to the portfolio at $23.70 on July 11. The company is 20.4% undervalued, and my price target is the stock's fair value at $29.94, which I expect it to reach in the second half of 2005.

A future growth area for SBC is Cingular Wireless, which it owns jointly with BellSouth (BLS:NYSE). Recently Cingular, the country's largest wireless provider, announced several multimillion-dollar upgrades to better serve its more than 51 million customers. Cingular's network provides service throughout the U.S., including the top 100 markets. The growth of its network relies on advanced GSM technology, a wireless communication standard that covers more than a billion people worldwide.

As part of its 2005 investment, Cingular is deploying high- speed, third-generation (3G) service to customers in 15 to 20 major markets, with plans to expand to most major markets by the end of 2006. Customers using the 3G service will be able to use a wireless handset to make a voice call, simultaneously check email and browse the Internet at speeds similar to wired broadband services.

Sirius Satellite Radio (SIRI:Nasdaq, $6.82, 1,000 shares, 5.59%): This 1,000-share position was established at $4.81 on April 28. Sirius is 29.5% undervalued, and my price target is $9.76 per share -- which is the stock's current fair value. I expect Sirius to reach this price target in the second half of 2005.

This week, rival XM Satellite Radio (XMSR:Nasdaq) reported that it ended the quarter with a total of 4.4 million subscribers, more than double the number of a year earlier, and raised its year-end 2005 forecast from 5.5 million to 6 million subs. The cost of adding each new subscriber fell to $98, vs. $101 in the year-ago quarter, or $50 per subscriber excluding advertising and marketing expenses. These are the comparisons Sirius will face when it reports before the open on Tuesday. Sirus is expected to post a loss of 15 cents a share on $50.1 million in revenue. In my judgment, Sirius should be experiencing similar if not better subscriber growth. A look at their share prices shows that from their April lows to their July highs, XM shares are up 42.6% while Sirius is up 69.5%.

Symantec (SYMC:Nasdaq, 21.95, 400 shares, 7.19%): I added 225 shares of Symantec at $18.31 on May 11, and another 175 shares on Friday, July 29, at $22.10, giving me an average cost basis of $19.97. Symantec is 21.7% undervalued, and my price target is my annual risky level at $25.52. I expect the stock to achieve this price target in the second half of 2005.

From Thursday's close to Friday's low, Symantec's stock fell 10.3% on the heels of its Thursday night earnings report. Quarterly revenue of $699.9 million missed consensus estimates of $712.2 million, although earnings of 27 cents a share beat by 2 cents. This selloff gave me an opportunity to add more shares to the model portfolio Friday morning.

Symantec recently acquired security software firm Veritas for about $10.5 billion, but the deal closed after the end of the quarter, so results for Veritas were not included in this report. On its conference call, Symantec was upbeat on the merger, but lowered guidance for the combined company to $5.13 billion from $5.3 billion. In my judgment, when you put together a $13.5 billion merger, there are enough uncertainties to account for this minor decline in guidance.

Regards,

Richard Suttmeier

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