Technology Report Weekly Roundup

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Tech's hot streak continued as August began, but the market's selloff in reaction to stronger-than-expected payroll data Friday morning showed that the Nasdaq may be ready to retrace some of its well-deserved gains. On Tuesday and Wednesday, the index tested 2219, a level not seen since June 2001, but by week's end the Nasdaq had slipped back to 2178 at the close.

Things are getting more volatile; here are the levels to keep an eye on in the trading ahead.

My model shows two monthly value levels, or prices where buyers are likely to re-emerge, for the Nasdaq. The first is 2162, which if tested on a pullback would be a correction of only 2.6% -- not a big deal for long-term investments in technology stocks. The lower monthly value level is 2060, which would mark a 7.2% correction. That drop is still not too bad considering that my models show that the Nasdaq could reach my quarterly risky level at 2381 by the end of the quarter, if not by Labor Day. (A risky level is a price at which investors are likely to reduce holdings, according to my model.)

Looking more closely at individual tech measures, the Nasdaq 100 Trust (QQQQ:Nasdaq) has lagged the broader average slightly with a high of 40.14, still slightly below the December 2004 high of 40.33. This means that the market performance of the largest 100 Nasdaq companies has lagged the remainder of the index by only a small percentage, but these companies will benefit the most by the expected surge in IT spending. So this trend should be ending as the leadership baton is passed to the likes of Microsoft (MSFT:Nasdaq) and Cisco Systems (CSCO:Nasdaq), two portfolio members poised to lead over the next six months.

To recap, from the April 29 low of 1890 to this week's high at 2219, the Nasdaq gained 17.4%; and the QQQQs were up 16.9%, from $34.35 to $40.14. The Philadelphia Semiconductor Index (SOX) has been the market leader, up 29.1% from 376.64 to its high this week of 486.34. In this light, the correction the past two days is not surprising, but should end next week as long as the Fed does not become more hawkish concerning inflation. My models show upside potential to 2381 on the Nasdaq, $42.82 on the QQQQ, and 523.14 on the SOX. These targets are quarterly risky levels from my models, and if the market gets there, I will be looking for some short ideas for the model portfolio.

Semiconductors continue to perform well. The Semiconductor Industry Association (SIA) reported on Monday that chip sales for the first half of 2005 were up 6.5% vs. the first half of 2004. The SIA expects semiconductor sales to show continued strong growth in the second half on increased sales of PCs and consumer electronics because of back-to- school and holiday demand for the latest models of items such as laptops and cell phones. Total chip sales for 2005 are projected at $226 billion, up 6% from 2004.

Speaking of positive surveys, CIO magazine's latest poll on information technology (IT) spending shows a noticeable improvement in companies' spending plans in July, and security software and storage head the list. This does not surprise me in the wake of the July terrorist attacks, as companies get more serious about protecting their systems.

In earnings news this week, Sirius Satellite Radio (SIRI:Nasdaq) reported better-than-expected results, whereas Time Warner (TWX:NYSE) was a slight disappointment. On deck for next week is tech bellwether and portfolio member Cisco, which is expected to report EPS of 25 cents. Also of interest will be earnings from Dell Computer (DELL:Nasdaq), which is expected to report EPS of 38 cents.

Economic data this week continued to show a strong economy. The ISM Index, personal income, factory orders, and this morning's payroll data all were stronger than expected. On the docket for next week are readings for July retail sales and second-quarter productivity. I have been looking for reduced productivity to help build the need for IT spending to kick-start productivity gains. Of importance, too, will be the Federal Open Market Committee (FOMC) decision on Tuesday about whether to raise the federal funds rate once again, to 3.5%. As I have noted, the strength of the Nasdaq has not faded in the face of higher interest rates, and I expect the FOMC to raise the funds rate to 3.50% on Tuesday.

My fundamental models show the technology sector as the only undervalued sector now at 12.8% undervalued vs. 13.0% last week. Health care is at fair value, and seven of 11 other sectors are overvalued by more than 5%: basic industries, by 6.6%; capital goods, 6.2%; consumer durables, 10.4%; consumer nondurables, 7.7%; energy, 16.2%; finance, 5.8%, and public utilities, 8.8%. These figures make a rotation into technology the most compelling investment strategy.

Within technology, computer manufacturers ended the week 25.1% undervalued vs. 25.0% last week; semiconductors ended the week 17.2% undervalued vs. 19.0% last week; and software was 15.6% undervalued vs. 16.7% last week.

The benchmark Technology SPDR (XLK:Amex) ended the week up 0.57%, while the S&P 500 was off 0.63%. Since its inception April 4, the model portfolio is up 6.86% (including cash) vs. a gain of 9.35% for the XLK and 4.57% for the S&P 500.

The model portfolio's gain since its inception on the dollars invested is 8.82%. Of 19 open positions, four are outperforming the XLK and showing double-digit gains.

This week was a quiet one for the portfolio. With 19 long positions, and the potential upside on the Nasdaq limited to about 8% or so through Labor Day, it is difficult to identify new portfolio stocks. On the other hand, with 8% or so possible upside over the next four weeks, it is equally dicey to short technology stocks at this time. My models provide value levels at which to buy on weakness, and risky areas at which to reduce on strength, but this week's appropriate levels were not tested.

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, $19.30, 600 shares, 9.46% 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 32.4% undervalued. My price target is the stock's fair value at $28.90, which I expect the stock to reach by the end of the year.

According to an independent research company that specializes in channel checks, Cisco's deal pipeline is strong, with either steady or less time required to close deals. There is increased demand for IP telephony, security and storage solutions, and these sources see limited competition and no discounting of prices. This is a great environment for Cisco when it reports earnings on Aug. 9.

Gateway (GTW:NYSE, $4.03, 1,200 shares, 3.95%): I added 1,200 shares of Gateway on July 6 at $3.42 a share. The company is 66.5% undervalued. My price target is my quarterly risky level at $5.59.

On Wednesday, Gateway said it would release its second- quarter earnings on or before Aug. 15, pending finalization of accounting for the Microsoft (MSFT:Nasdaq) agreement regarding antitrust issues, which was signed in April. I will update readers with details once the company files its results.

Gateway has been gaining sales in 2005 for its information technology products at major businesses and organizations, which is helping its turnaround. On Friday, it announced a deal with the University of Texas at San Antonio to provide notebook and tablet computers for some 26,000 students and 3,500 staff members. Students are being offered special discounts and initiatives, including the waiving of interest charges. This is a four-year agreement, and deals such as this should benefit Gateway long term as students are likely to stick with Gateway products as they enter the job market after graduation.

Integrated Device Technology (IDTI:Nasdaq $11.12, 375 shares, 3.41%): I added 375 shares of IDT to the portfolio at $10.42 on July 11. The shares are 44.0% undervalued, and my price target is the stock's 52-week high at $21.25, which I expect it to reach by the end of the year.

Last week, IDT refiled regulatory documents pertaining to its proposed merger with rival chipmaker Integrated Circuit Systems (ICST:Nasdaq), which reports earnings next week. Wall Street expects ICS to earn 19 cents per share. The acquisition should close later this year, according to IDT, pending shareholder approval. The combined IDT/ICS will be a specialty chipmaker for communications gear, computers and electronic devices.

Juniper Networks (JNPR:Nasdaq, $23.63, 175 shares, 3.38%): I added 175 shares of Juniper to the portfolio at $23.70 on July 25. My model shows Juniper 52.6% undervalued. My price target is my quarterly risky level at $33.37. I expect the shares to reach this price target in the second half of 2005.

On Tuesday, Juniper announced that Cybera, a high-speed networking services provider, has begun using its routing platforms and firewall protection products to enhance performance, security and reliability. This deal shows that Juniper will be gaining business as corporate networks upgrade to meet the increased demand for broadband.

Microsoft (MSFT:Nasdaq, $27.76, 150 shares, 3.40%): On June 30, I added 150 shares of Microsoft at $25.06. The software maker is 11.3% undervalued. My price target is $30.73, which is the stock's fair value and a price I expect the stock to achieve in the second half of 2005.

New catalysts for growth are being launched at Microsoft with several new products. In its just-ended fiscal 2005, revenue grew 8% to $39 billion. New versions of Windows, Office and Xbox are among the products that should turn Microsoft into a growth company in 2006. At last week's analyst/shareholder meeting, the company indicated that it expects sales growth to accelerate to 10%-12% in fiscal 2006.

Newport (NEWP:Nasdaq, $13.45, 600 shares, 6.59%): 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 56.4% 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.

Shares of Newport rebounded this week, from last Friday's postearnings low of $12.88 to this week's high of $14.24, up 10.6% -- but then shares sold off Thursday and Friday along with the broader market, ending the week at $13.45.

Open Text (OTEX:Nasdaq, $12.15, 325 shares, 3.23%): I added 325 shares of Open Text to the model portfolio on July 26 at $12.24. The stock is 58.9% undervalued, and my price target is my semiannual risky level at $18.34, which I expect shares to achieve by the end of 2005.

On Tuesday, Open Text announced that Siemens (SI:NYSE ADR) would increase its use of Open Text content-archiving software to create a globally accessible central archive system. This IT enhancement was necessary to handle new compliance issues, and should reduce Siemens' expenses and increase efficiency. As this deal shows, Open Text is positioned to gain business as corporations upgrade their compliance-related communications software.

To review, Open Text provides what's called enterprise content management (ECM) software to connect people, processes and information in global organizations. The company's reach is worldwide, with its software in use at 20 million seats in offices in more than 100 countries.

QLogic (QLGC:Nasdaq, $32.64, 275 shares, 7.33%): 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 23.3% undervalued, and my price target is my quarterly risky level at $39.35, which the stock should reach in the second half of 2005.

QLogic continues to win awards for its products, and this week won the "SAN Product of the Year" award from Storage Magazine for its SANbox 5200 Fibre Channel stackable switch. QLogic should benefit from this recognition, given the demand that's expected for this product during the IP upgrade cycle, which has only just begun.

RSA Security (RSAS:Nasdaq, $13.02, 325 shares, 3.46%): I added 325 shares of RSA to the portfolio at $12.21 on July 11. It is 45.8% undervalued, and my price target is the stock's quarterly risky level at $17.44., which I expect the company to achieve in the second half of 2005.

On Thursday, RSA Security launched a new product called Best Practices Framework that's designed to help global business enterprises secure computer data from hackers. This software reduces the risk that critical customer information can be stolen for such things as identity theft, which has exploded in recent years.

Sun Microsystems (SUNW:Nasdaq, $3.72, 3,000 shares, 9.12%): 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 23.5% undervalued.

After reporting an unexpected quarterly profit, Sun Micro is set for more turnaround growth in fiscal 2006. Sun's book-to-bill ratio is now positive, and even after spending $4.1 billion for Storage Technology (STK:NYSE) the company still has $3 billion in cash for more acquisitions.

On Monday, Sun Micro announced that General Electric (GE:NYSE) is deploying its Sun Java System Identity Manager across all of its business units, for a total of 450,000 units around the world. This allows GE to automatically monitor employee information, including an employee's job function. The win for Sun is having another of its applications in a major data center.

According to published reports, a Sun Microsystems executive has identified India as one of four countries that will receive "major investments" as part of the company's Global Mission Charter for Financial Year 2006. Sun Micro will be investing in several global service centers, anticipating growth in Bangalore, India; Prague, Czech Republic; St. Petersburg, Russia; and Beijing. Expanded facilities will help Sun gain a competitive edge in winning business at the major data centers in those emerging economies.

Time Warner (TWX:NYSE, $18.09, 450 shares, 6.65%): 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 33.0% undervalued. My price target is $27.77, the stock's fair value, which I expect it to reach in the second half of 2005. The stock closed this week above its 200-week moving average at $17.75 for the first time since breaking below it in September 2001 -- a sign the weekly chart is anticipating that the company's turnaround will be successful.

Time Warner has been in the model portfolio since the beginning in April, and I sent out an alert to subscribers following its earnings report on Wednesday updating my perspective on this position. As CEO Dick Parsons indicated to viewers on CNBC -- just as my alert was posted -- investors should be patient with the turnaround at Time Warner's America Online business. I expect the AOL portal services to compete successfully with the likes of Google (GOOG:Nasdaq) and Yahoo! (YHOO:Nasdaq) for coveted advertising dollars once these new enhanced services have successfully launched.

On Thursday, America Online said that it has purchased Xdrive, an online storage company, to meet anticipated growing demand from consumers who are expanding their collections of digital music and photo files. Xdrive will continue to sell storage and backup services as a subsidiary of AOL.

VeriSign (VRSN:Nasdaq, $24.95, 150 shares, 3.06%): 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.

VeriSign was added to the portfolio on a negative reaction to its earnings on July 20. Since its low of $23.45 on July 21, it has traded as high as $26.62, up 13.5%. This shows the importance of having the investment discipline to buy when a stock becomes 40% undervalued.

On Thursday, Jamster! a wholly owned subsidiary of VeriSign, announced that it is the exclusive provider of mobile content for "Scream Tour IV: The Heartthrobs" a concert tour featuring hip-hop and rhythm-and-blues artists such as Bow Wow, Omarion, Marques Houston and 3on3. I don't know these artists, but I know that young cell-phone users will be looking to download ringtones from Jamster! that focus on these performers.

Xilinx (XLNX:Nasdaq, $27.82, 150 shares, 3.41%): This 150- share position was added to the portfolio at $26.52 on June 20. The stock is 28.8% undervalued. My price target is my monthly risky level at $30.85, a price I expect the stock to achieve in the second half of the year.

On Tuesday, Xilinx announced that it was collaborating with Siemens Medical Solutions to help develop 3D medical imaging solutions. Siemens chose Xilinx in part because of its Virtex-4 programmable technology, as well as the technical expertise of the Xilinx design services team. With this deal, Siemens Medical Solutions has become a member of the Xilinx Alliance Program. As companies become members and learn about Xilinx products, they are more likely to choose those products in IT deployments.

Zygo (ZIGO:Nasdaq, $11.20, 400 shares, 3.66%): I added 400 shares of Zygo at $10.60 on July 11. The company is 57.9% 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.

There was no company-specific news of note on Zygo this week.

TWOS

EMC (EMC:NYSE, $13.68, 300 shares, 3.35%): EMC rejoined the model portfolio at $13.75 on June 29, and shares are now 58.8% undervalued. My price target is my monthly risky level at $15.15, and a price I expect EMC to reach in the second half of 2005.

In a newsy week for EMC, on Monday, Banc of America Securities reiterated its buy rating for EMC, including a price target of $15.25. Then on Wednesday, EMC introduced four new models of its CLARiiON Disk Library disk-based backup and recovery solution. These new models feature hardware and software products that offer twice the performance and capacity of previous models.

Last, on Thursday, EMC told investors that it would continue to buy back shares, and expected revenue to grow 14% in 2006. The company also reaffirmed full-year 2005 guidance, including EPS of 50 to 51 cents on $9.6 billion in sales.

Intel (INTC:Nasdaq, $26.77, 475 shares, 10.39%): 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 18.4% 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 announced on Monday that it had opened four platform- definition centers around the world -- in Bangalore, India; Cairo, Egypt; Sao Paulo, Brazil; and Shanghai, China. These centers will be used to educate local IT professionals on how to develop computing products based on Intel technology, and will identify specific environmental issues in these key markets. Intel is well-positioned to benefit from economic growth in these emerging markets.

On Wednesday, Intel said it was partnering with Boeing (BA:NYSE) to provide an in-flight Wi-Fi service. Boeing's Connexion Wi-Fi service will support Intel's Centrino mobile-chipset technology. With this service, travelers can surf the Web, check email and access corporate data while in flight.

SBC Communications (SBC:NYSE, $24.61, 170 shares, 3.42%): I added 170 shares of SBC to the portfolio at $23.70 on July 11. The company is 21.0% undervalued, and my quarterly risky level is at $29.22, which I expect it to reach in the second half of 2005.

On Monday, Cingular Wireless (jointly owned by BellSouth (BLS:NYSE) and SBC) announced a 10-year distribution agreement with RadioShack (RSH:NYSE), which will give the wireless carrier more than 5,000 new sales outlets. RadioShack plans to end its relationship with Verizon Wireless because RadioShack wants access to the GSM wireless standard, which Cingular provides.

Sirius Satellite Radio (SIRI:Nasdaq, $6.76, 1,000 shares, 5.52%): This 1,000-share position was established at $4.81 on April 28. Sirius is 28.2% undervalued, and my price target is $9.68 per share -- which is the stock's current fair value. I expect Sirius to reach this price target in the second half of 2005.

Sirius continues to expand its reach. Its radios will soon become a factory-installed option in certain 2006 Ford models. The radios will be preactivated so that sales personnel at dealerships can conduct an in-vehicle service demonstration. The option will carry a price tag of $195, with a six-month subscription included. In a separate announcement, Sirius radios will be available as a postproduction, dealer-installed option on the 2005 Toyota Avalon and Lexus GS 300/430. That makes a total of 11 vehicle models at automakers Toyota, Scion and Lexus with this Sirius radio option.

On Wednesday, Bear Stearns upgraded Sirius to outperform from peer perform.

Symantec (SYMC:Nasdaq, 22.05, 400 shares, 7.21%): 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 26.2% undervalued, and my price target is my annual risky level at $25.53. I expect the stock to achieve this price target in the second half of 2005.

On Wednesday, Symantec announced that its Norton Internet Security 2005 software will be preinstalled on new Gateway and eMachines desktop and notebook PCs. Through this agreement, customers will receive a 90-day complimentary subscription to Symantec's protection updates, and will then be offered the option to purchase a 12-month renewal. The software package will include Norton AntiSpam, which filters out spam and protects against email fraud, and the Norton Personal Firewall, which provides firewall protection to users.

Regards,

Richard Suttmeier

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