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Technology Report Weekly Roundup

By Richard Suttmeier | 02/17/06 - 05:23 PM EST
Stocks in Focus: CKCM, CSCO, DELL, EMC, INTC, JNPR, PWAV, QQQQ, SGTL, SMH, SYMC, T, TWX, XMSR

Considering the current market dynamics of weakening valuations, overbought technicals and overhead resistances, the technology sector has been more resilient than most market observers would expect. The Nasdaq rebounded from a low of 2233 on Monday to a high of 2294 on Thursday, above resistance for the week at 2284 but below resistance for the month at 2313. Keep in mind that the high for the year was set at 2232 on Jan. 11, which was a test of my quarterly resistance at 2331.

In terms of fundamentals, the technology sector should be at least 20% undervalued to merit adding cash to investments in tech stocks. But at present, the sector is only 4.9% undervalued. Similarly, computer manufacturers are only 7.4% undervalued, semiconductors are only 5.8% undervalued, and software companies are only 7.0% undervalued. Given the volatility of these industries, the fundamentals are not compelling at this time. If I set my screen to find technology stocks that are rated strong buy or buy according to ValuEngine, are at least 20% undervalued and have a market capitalization of $1 billion or more, I come up empty.

Regarding the technicals, the weekly chart profile for the Nasdaq shows declining momentum. However, recent weekly closes have been at or just above the five-week modified moving average (MMA), which has prevented the formation of a negative pattern. The five-week modified moving average is 2266, and my model shows monthly and quarterly resistances at 2313 and 2331, respectively.

For the Philadelphia Semiconductor Index (SOX), the weekly chart profile still shows overbought momentum, with the index above its five-week MMA at 523.54. For the SOX, I show a monthly pivot at 529.84, and weekly resistance at 559.10 is right around the January 2004 high of 560.48.

The downside risks in tech must be reiterated. For the Nasdaq, the risk is to quarterly support at 2159, and perhaps to my semiannual support at 1853. For the SOX, my quarterly supports are 488.82 and 394.12, with my semiannual support at 331.41. Given these numbers, the overall risk/reward profiles are not favorable for adding aggressively to tech stock positions.

However, finding an alternative sector to invest in is no easy matter. That's because all other sectors are overvalued: basic industries by 15.1% vs. 16.6% last week; capital goods by 9.9% vs. 9.2%; consumer durables by 4.2%; consumer non-durables by 10.3% vs. 8.6%; consumer services by 2.9%; energy by 6.6% vs. 11.9%; finance by 5.9% vs. 5.7%; health care by 3.6%; public utilities by 7.7% vs. 7.6%; and transportation by 6.8% vs. 6.7% last week.

Turning to the model portfolio, I removed five positions this week: Altera (ALTR:Nasdaq), SigmaTel (SGTL:Nasdaq) and VeriSign (VRSN:Nasdaq) were closed based upon their valuations. Altera was closed for a gain of 7.5%, VeriSign had a gain of 14%, and SigmaTel was closed for a loss of 13.5%. This morning I removed the positions in small-cap Click Commerce (CKCM:Nasdaq) for a gain of 15.5%, and mid- cap Powerwave (PWAV:Nasdaq) for a gain of 11.6%. In addition, I pared back positions in Cisco Systems (CSCO:Nasdaq) for an overall gain of 3.4%, Juniper (JNPR:Nasdaq) for an average loss of 13.1%, and Symantec (SYMC:Nasdaq) for an overall loss of about 17% in preparation for the closure of this newsletter service on Feb. 28 and to reposition the portfolio to reflect my analysis that tech stocks are not currently cheap enough fundamentally.

For those of you who may have missed the note, on Thursday afternoon you received an email from Editor in Chief Dave Morrow indicating that TheStreet.com Technology Report would be discontinued after Feb. 28, when you will receive the final Monthly Report after the close. Your subscription will automatically be transferred to TheStreet.com Internet Review, authored by James Altucher, effective March 1. Check the email for more details, or call TheStreet.com customer service at 1-866-321-TSCM (8726) with any questions you may have. I want to thank TheStreet.com for the opportunity to write a newsletter, and you will be in good hands with Altucher.

The benchmark Technology SPDR (XLK:Amex) ended the week up 1.3%, while the S&P 500 added 1.6%. Since its inception on April 4, 2005, the model portfolio is up 5.8% (including cash) vs. a gain of 13.3% for the XLK and 9.8% for the S&P 500. The model portfolio's closed positions are up 5.6%. To review my portfolio strategy, I am focusing predominantly on big-cap technology leaders, turnaround stories and emerging technologies within my focus industries of computer manufacturers, semiconductors and software. The model portfolio focuses on tech stocks that are at least 20% undervalued, and does not include overvalued stocks even though they may be trading higher. (I cover momentum stocks in columns on RealMoney.)

Here are my trading strategies for the coming week:

-- Cisco (CSCO:Nasdaq): Remove this 225-share position on strength to my six-month price target at $21.12, the stock's fair value.

-- Dell (DELL:Nasdaq): Remove this 150-share position on strength to my six-month price target at $36.94, which is my quarterly risky level.

-- EMC (EMC:NYSE): Reduce this position by 300 shares on strength to my monthly pivot at $14.03.

-- Intel (INTC:Nasdaq): Reduce this position by 150 shares on strength to my monthly risky level at $26.90.

-- Juniper Networks (JNPR:Nasdaq): Remove this 175-share position on strength to my six-month price target at $23.56, my monthly risky level.

-- Symantec (SYMC:Nasdaq): Remove this 200-share position on strength to my six-month price target at $22.10, the stock's fair value.

-- AT&T (T:NYSE): Add 170 shares to the model portfolio on weakness to my monthly value level at $24.45.

-- Time Warner (TWX:NYSE): Reduce this position by 225 shares on strength to my quarterly risky level at $19.96.

-- XM Satellite (XMSR:Nasdaq): Remove this position from the model portfolio on strength to my monthly pivot at $29.71.

Short Positions

-- Nasdaq 100 Unit Trust (QQQQ:Nasdaq): Add 100 shares to this short position on strength to my monthly risky level at $44.00.

-- Semiconductor HOLDRs (SMH:Amex): Add 200 shares to this short position on strength to my monthly risky level at $41.23.

Now let's recap all of the portfolio holdings. But first, a quick review of the model portfolio rating system: Ones are stocks that are rated strong buy or buy, are at least 20% undervalued and should be bought right now. Twos are stocks that are rated hold or better, are undervalued by at least 20% and should be bought on a pullback in price. Threes are stocks that are rated hold or better, are undervalued by less than 20% and should be sold on strength in price. Fours are stocks that are rated sell or strong sell, are overvalued by at least 40% and should be sold on strength. Hedges are for exchange-traded funds, which do not have a rating from my model.

Changes to Ratings This Week: Time Warner (TWX:NYSE) moves from a THREE to a TWO, as the stock is now more than 20% undervalued.

ONES

AT&T (T:NYSE, $28.28, 170 shares, 7.31%): AT&T, the nation's largest telecom-service provider, is experiencing strong growth in wireless, broadband and business services. On Monday, the American Hospital Association said it has endorsed AT&T voice and data networking products and services for its members. These include almost 5,000 hospitals and health care organizations, as well as 37,000 health care professionals. In turn, AT&T will be assessing the information technology (IT) needs of AHA members over the coming months. AT&T is rated a buy according to ValuEngine and is 32.5% undervalued with fair value at $42.13, which is my six-month price target. The weekly chart profile shows overbought momentum with the five-week MMA at $26.25. Shares are solidly above monthly value levels of $24.45 and $22.52.

TWOS

Dell (DELL:Nasdaq, $30.38, 150 shares, 6.92%): In addition to PCs, Dell makes servers, storage devices, workstations and printers and offers consumer electronics products -- including flat-panel TVs and MP3 players. The company also provides software and other information technology services to corporations. An example of its initiatives in this area was seen on Monday when Dell unveiled its eHealthcare Architecture, an IT platform to help health care organizations improve their efficiency and lower costs in managing patient care. On Thursday evening, the company reported fourth-quarter earnings of 43 cents a share, above the Street estimate of 41 cents. Dell also reported record revenue of $15.2 billion, above the consensus estimate of $14.83 billion, which was driven by growth in enterprise products and services, and sales outside the U.S. But the company's guidance for the current quarter was slightly below estimates, so shares gave up their nearly 2% after-hour gain and traded as low as $30.13 on Friday. Dell is rated a hold according to ValuEngine, and is 22.7% undervalued with fair value at $41.08. The weekly chart profile shows rising momentum with the five-week modified moving average at $30.79 and the 200-week simple moving average at $32.98. I show a monthly value level at $26.81, a monthly risky level at $34.37 and a quarterly risky level at $36.94, which is my six-month price target.

EMC (EMC:NYSE, $13.48, 600 shares, 12.29%): EMC, the leader in storage solutions and full-service information technology, should benefit from strong demand in 2006 as major corporations upgrade their data-storage systems and networks. EMC shares moved sideways this week with no significant developments to propel the stock up or down, despite the Nasdaq rally. ValuEngine rates EMC a hold, and the stock is 38.3% undervalued with fair value at $21.89. My six-month price target is EMC's 52-week high at $15.09. The weekly chart profile shows declining momentum with the five-week MMA at $13.51, above support at the 200-week SMA at $11.18 -- which should hold if shares fall. I show a monthly value level at $12.94, quarterly pivots at $13.36 and $13.22, and a monthly pivot at $14.03.

Intel (INTC:Nasdaq, $20.61, 300 shares, 9.40%): Intel is the world's leading chipmaker. At the 3GSM World Congress in Barcelona this week, Intel and Audistry, a subsidiary of Dolby Laboratories (DLB:NYSE), announced a deal to integrate Audistry's technology into a new generation of mobile phones and other portable audio devices. The aim is to enhance the products' sound quality and involves Intel's wireless WMMX technology. Also this week, Apple Computer (AAPL:Nasdaq) said it has begun shipping the new MacBook Pro, its first laptop featuring Intel's microprocessors. ValuEngine rates Intel a hold, and the stock is 23.9% undervalued with fair value at $27.94, which is my six-month price target. The weekly chart shows declining momentum with the five-week MMA at $22.76, below the 200-week SMA at $23.66. My semiannual value level is $19.66, and monthly and quarterly pivots are $22.19 and $23.41, respectively. My monthly risky level is $26.90.

Juniper Networks (JNPR:Nasdaq, $17.97, 175 shares, 4.78%): On Friday, I reduced this position by 500 shares at $18.40, for an average loss of 13.1% as part of my repositioning of the model portfolio. Even so, I believe that Juniper will benefit in 2006 as wireless networks and corporations upgrade their Internet protocol (IP) networks. On Monday, Juniper announced that a new version of its operating system that enhances the performance of applications on its clients' data centers would be available in March. Also this week, Juniper demonstrated its international reach. The gearmaker and Kaspersky Lab, a Moscow-based developer of security solutions, have formed an alliance to integrate Kaspersky's virus and spyware-protection software into Juniper's firewall virtual private network (VPN) security appliances, which will further expand Juniper's global market presence. RTL Television, Germany's leading TV station, will be upgrading its broadcast distribution network, and China Telecom Shanghai is expanding its core IP network, both using Juniper's routers. ValuEngine rates Juniper a hold, and the stock is 42.3% undervalued with fair value at $32.58. The weekly chart profile shows declining momentum with the five-week MMA at $20.12 and the 200-week SMA at $18.12. I show a semiannual pivot at $17.75, a monthly pivot at $18.81 and a monthly risky level -- which is my six-month price target -- at $23.56.

Symantec (SYMC:Nasdaq, $17.52, 200 shares, 5.32%): I also reduced this position by 225 shares at $17.45 on Friday, for an average loss of 17%. Symantec is a leader in information security, offering software, hardware and services to protect IT infrastructures. Shares moved sideways to up this week, which is a positive given the lack of company-specific news this week. ValuEngine rates Symantec a hold, and the stock is 21.3% undervalued with fair value at $22.10, which is also my six-month price target. The weekly chart profile shows flat momentum with the five-week MMA at $17.85 and the 200-week SMA at $17.39. The 52-week low is $16.32, and monthly and annual pivots are $18.17 and $19.50, respectively. My annual risky level is $21.85, my monthly risky level is $22.83, and my semiannual risky levels are $25.26 and $26.04.

Time Warner (TWX:NYSE, $17.78, 675 shares, 18.24%): My focus is on Time Warner's turnaround of its America Online division, and I believe that billionaire investor Carl Icahn's activities to interfere with those plans are an annoyance in the turnaround process. After the close on Thursday, the Wall Street Journal reported that Icahn has scaled back his drive to take over Time Warner, and would seek only a partial slate of directors to work with exiting management. This week America Online launched the first beta version of its new Chinese language AOL.com Web portal, which targets the Chinese-speaking population in the U.S. The service includes Web search and email capabilities, news from Europe and Asia, and free movies, popular TV shows and sporting events from China. Time Warner is rated a hold according to ValuEngine, and is 20.4% undervalued with fair value at $22.67, which is my six-month price target. The weekly chart profile shows rising momentum, with the five-week MMA at $17.87 and the 200-week SMA at $16.15. My quarterly pivot is $16.97, monthly pivots are $17.73 and $18.29, and a quarterly risky level is $19.96.

XM Satellite Radio (XMSR:Nasdaq, $21.57, 150 shares, 4.92%): XM Satellite has more than 6 million subscribers for its satellite radio service, which offers 160 digital channels including 65 commercial-free music channels. As part of its strategy to win new subscribers, the company has alliances with major automakers for factory-installed units on a total of 140 vehicle models in 2006. But the dominant news this week was XM's weaker-than-expected earnings report Thursday morning. The company posted a loss of $1.22 per share in the fourth quarter vs. the consensus estimate of a loss of 92 cents per share. XM cited higher costs for marketing and acquiring subscribers, $141 per sub vs. expectations of $125. Looking forward, the company now expects to exceed 9 million subscribers by year-end, and projects 20 million by 2010. Also, XM expects to be cash-flow positive by the end of 2006. A concern was that the earnings report included the resignation of a director from the company's board, who warned of a looming "crisis." Although it's not clear what that warning referred to, shares slumped as low as $22.94 on the report. The stock is rated a hold according to ValuEngine, and is 37.0% undervalued with fair value at $37.60. The weekly chart profile shows oversold momentum, with the five-week MMA at $26.55 and the 200-week SMA at $20.81. I show semiannual pivots at $26.34 and $26.16, and a monthly pivot at $29.71. The monthly risky level is $35.40 and the quarterly risky level is $35.84, which is also my six-month price target.

THREES

Cisco (CSCO:Nasdaq, $19.86, 225 shares, 6.79%): As this stock is only 5.6% undervalued, I reduced this position by 375 shares at $19.86 on Friday for a net gain of 3.4%. Cisco is the world's largest supplier of routers and switches used to direct traffic on the Internet superhighway, which telecom service providers are making faster and safer. Over the coming months, Cisco will be combining products and services from Scientific-Atlanta (SFA:NYSE) with smaller versions of Cisco networking gear designed for consumer networking and entertainment platforms. The purchase of Scientific-Atlanta is expected to close by the end of the quarter. It was also revealed this week in a Securities and Exchange Commission filing that Cisco bought 13.86 million shares, a 9.7% stake, in China's top online game operator, Shanda Interactive (SNDA:Nasdaq ADR) last year. This deal could lead to the integration of Shanda's online games business into Cisco's home-networking products. Cisco is rated a hold according to ValuEngine, and is 5.6% undervalued with fair value of $21.12, which is my six-month price target. The weekly chart profile shows rising momentum, with the five-week modified moving average at $18.78. That puts it above the 200-week simple moving average at $18.12, which is a positive chart profile. I show monthly and quarterly value levels at $16.83 and $14.39, with a monthly pivot at $19.14, and quarterly risky level at $20.61.

HEDGES

Nasdaq 100 Unit Trust (QQQQ:Nasdaq, $41.21, (200) shares, 12.52%): I continue to project downside risk for the market in 2006, which justifies maintaining this hedge. The QQQQ's weekly chart profile shows declining momentum, and this week's close below the five-week MMA at $41.41 keeps this configuration negative. My semiannual value level is $30.44, quarterly pivots are $39.64 and $42.72, and a monthly pivot is $41.77. My monthly risky level is $44.00, and my buy-stop to cover this short is $45.93.

Semiconductor HOLDRs (SMH:Amex, $37.89, (200) shares, 11.51%): This is another hedge on the likelihood that chip stocks are due for a correction. The weekly chart profile for SMH shows declining momentum, and this week's close below the five-week MMA at $37.97 is a negative configuration. My monthly pivot is $38.00 with a monthly risky level at $41.23. My buy-stop to cover this short position is $43.15.

A Primer on My Investing Metrics

To screen for new picks, I use a three-pronged approach and evaluate more than 6,000 stocks. The key to my approach is that all stocks are reviewed and profiled by the same methodology, which allows me to provide guidelines to help traders and investors make their own decisions. I do this by setting my screens to find new technology stocks rated a buy or strong buy that are trading above $10 per share and undervalued by at least 20%.

Fundamental Screens: I calculate a fair value for every stock, which is the price at which a stock can trade in a perfect world. Fair value is not a price target; it is based on a stock's past data and projections for the future, including the trailing 12-month EPS, the forward 12-month estimated EPS and the yield on the 30-year Treasury bond. How these data points are weighted is based on a historical analysis of the stock's price history along with 17 other variables that influence the calculation based on the stock's sector and industry group. These variables also provide a rating, based on a bell-shaped curve that's generated by my screen, using ValuEngine.com. The ratings are: strong buy, buy, hold, sell or strong sell. Most stocks are in the middle of the curve as a hold. Only 2% of stocks are rated a strong buy or strong sell by these measures.

Weekly Chart Profile: A stock with a positive profile has a weekly close above its five-week modified moving average (MMA) with a rising 12x3 weekly slow stochastic, which is a measure of momentum on a scale of zero to 100. A reading above 80 is overbought. A stock with a negative profile has a weekly close below its five-week MMA with a declining 12x3 weekly slow stochastic. A reading below 20 is oversold.

Value Levels, Risky Levels and Pivots: A value level is a price at which buyers should emerge on share-price weakness. A risky level is a price at which sellers should reduce holdings on share-price gains. A pivot is a value or risky level that was violated in its time horizon, acting as a magnet during the remainder of that time horizon. These levels are calculated in weekly, monthly, quarterly, semiannual and annual time horizons, based on the past nine closes in each time horizon. My theory is that the closes over a nine-year period are the summation of all bullish and bearish events for that market or specific stock. At the end of December, the year-end closes provide new monthly, quarterly, semiannual and annual value levels, risky levels and pivots, which are important in measuring the risk/reward for shares in the first half of the next year.

Regards,

Richard Suttmeier

Stay Tuned for Monthly Report

The final edition will be sent out Wednesday morning.

02/28/06 - 12:39 PM EST
Making Adjustments
Stocks in Focus: CSCO, EMC, INTC, TWX

Booking profits in one position and trimming three others.

02/24/06 - 11:07 AM EST
Removing a Hedge
Stocks in Focus: SMH

Suttmeier's closing this protective position, which is no longer necessary.

02/23/06 - 10:11 AM EST
Technology Report Weekly Roundup
Stocks in Focus: CSCO, DELL, EMC, INTC, JNPR, QQQQ, SMH, SYMC, T, TWX, XMSR

The market's resilience continues as almost all sectors remain overvalued.

02/24/06 - 06:17 PM EST

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