Aug. 22, I screened tech stocks that were trading between $1 and $3. On Sept. 6, I opened the
Tech Stocks Five & Dime. Then on
Sept. 7, I screened for the best stocks trading between $3 and $5. Now I want to continue this theme by screening stocks that trade for less than $10 by technology industry.
Today, I'd like to open two new departments of the Tech Stock Five & Dime, the office and communications equipment area and the computer manufacturers and electronic devices section. And if you'd like to suggest another segment of low-priced tech stocks for me to screen, please
I will add other technology industries to the Tech Five & Dime such as computer-related, semiconductors and software to round out all the shelves within the entire tech sector, which is my area of expertise. To qualify to be in the aisles of the Tech Five & Dime, a stock must be at least 30% undervalued according to my model. Then I look at each stock's weekly chart profile to make sure that none were overly negative. For those with a negative technical profile, I advise buying on weakness to the value level I included for each stock on the shelf. Keep in mind that all stocks profiled are extremely risky and thus investments are speculative.
Office and Communications Equipment
The stocks I have chosen in the office and communications equipment industries are generally involved with wireline and wireless connectivity to networks. These are growth areas in the next wave of the Internet, which focuses on broadband applications.
designs telecom equipment that enhances voice and sound quality over wireline, wireless and satellite networks. The stock is 36.5% undervalued and has a neutral weekly chart profile. Its five-week modified moving average is at $7.30. Ditech Communication is cheap enough to buy, but there is risk to my monthly value level at $5.07, where investors will want to dollar-cost average on weakness. A weekly close above $7.30 would signal a turnaround, with the 200-week simple moving average at $9.58.
Even more undervalued is
, which designs communications equipment for telecom service providers, at 40.0% undervalued. Its weekly chart profile will shift to positive on a close this week above its five-week modified moving average at $9.08. The upside is enhanced if the close this week is also above my monthly pivot at $9.63. This would create the momentum for shares to trade back above the $10 threshold, and get the attention of equity fund managers.
But the first place for most undervalued in this group goes to
, which is a whopping 75% undervalued. The company designs digital-video processing systems to enable telephony-based service providers to broadcast digital-video signals over their networks. It has a negative weekly chart profile, but if the zone of the five-week modified moving average at $3.22 and 200-week simple moving average at $2.91 holds, the stock should have the potential to rise all the way to my quarterly pivot at $3.56.
is not as dramatically undervalued, at 9.5% undervalued, but still has promise. It has an oversold weekly chart profile, and the bounds of its five-week modified moving average and 200-week simple moving average are $4.15-$4.77. Investors should consider buying weakness to my annual value level at $3.27 for a potential rebound to my monthly pivot at $3.89.
Computer Manufacturers and Electronic Devices
In the computer manufacturers, I am looking at turnaround stories. These include companies that should benefit from the next PC and server upgrade cycles, and companies with components for devices to connect the wireless world.
On the hardware side of this aisle,
is dramatically undervalued, at 73.9% undervalued. It has a negative weekly chart profile, and my monthly value level is $2.38 with a quarterly pivot at $3.07. Gateway may have several catalysts for share-price growth developing. It's targeting small businesses with low-end servers, a new line of PCs and Web-based IT support. The company expects demand for all of its products to increase, and to support that, it's building a new U.S. manufacturing facility. On the retail side, it is now selling through stores in Japan and has added more retailers in the U.S. and U.K. A weekly close above my quarterly pivot at $3.07 would indicate potential strength to my quarterly risky level at $5.59. If you buy today, be prepared to dollar-cost average at $2.38.
There is also a slew of positive catalysts for
. The company just launched its new Galaxy server platforms, which are cheaper, faster and use less power and less space than those made by rival companies, such as
. The servers run Sun's Solaris operating system with open source code to help developers upgrade corporate and data center clients, which should make them popular. Within the next two weeks,
family of archiving storage products will be available on Sun's platforms.
Sun Micro's stock currently is 31.9% undervalued and has a positive weekly chart profile. Its holding the five-week modified moving average at $3.84 would indicate potential strength to the 200-week simple moving average at $4.91, with my quarterly risky level at $5.05.
Moving over to the electronic devices side of this aisle,
designs analog and digital semiconductors for mobile communications applications. I show Skyworks hugely undervalued, at 61.1% undervalued. It also has a negative weekly chart profile on last week's close below the five-week modified moving average at $7.32. The fundamentals appear favorable, but I would wait to buy weakness until the stock reached its Aug. 12 low of $6.66.
designs access management software products and services for securing digital identities, concentrating on Internet connectivity over wireless devices. I show Entrust 43.1% undervalued with a neutral weekly chart profile, which would shift to positive on a weekly close above the five-week modified moving average at $5.76. Given the stock's positive fundamental screen, buying weakness to my monthly value level at $5.52 should offer good reward for the risk.
Guidelines for Price Levels
Low-priced stocks, those trading for less than $10, are particularly attractive to individual investors because it's easier to establish a large position in these stocks with less capital. But before you invest in any of the stocks that fall into any of the four categories I've outlined, please consider the amount of risk you can tolerate, and be aware that all of the stocks in these groups should be considered speculative.
Options on Survival:
This group includes stocks trading in the $1-to-$3 range. Stocks in this category are option plays on the company's survival. Buy them only if you can afford to lose 100% of the investment, because stocks become worthless at bankruptcy, which is a high risk for companies with stocks in this price range.
Margin Threshold Stocks:
Stocks in this group trade for less than $5 but more than $3. Many brokerage firms will not allow their clients to buy stocks trading for less than $5 on margin. Keep in mind that these stocks trade below $5 for a reason, like their Options on Survival kin; their companies are at risk for bankruptcy. However, unlike members of that lower-priced group, stocks that trade between $3 and $5 have a better chance of survival.
Five & Dimers:
This class of stocks, those that trade between $5 and $10, tends to stay in that range. Many mutual fund managers, by their fund guidelines, can't own stocks trading below that upper level. If there is a reason for a stock to fall below $10, expect to see selling pressure from the mutual fund managers. Once the selling subsides, and if the stock stays above $5, some speculation is merited in stocks that still have positive profiles. I believe a good strategy for members of this group is to buy tech stocks trading for less than $10, but to keep a sell-stop in case the stock breaks below $5. Stocks from the Five & Dime should be considered speculative. But they can be rewarding if you find the ones that can get back above $10 before they break below $5. A positive chart profile is a good indicator for stocks trading in this range.
Stocks Below $1:
Often called penny stocks, stocks that have drifted down from higher levels to become members of this group become subject to delisting. I will not comment on these, or on stocks trading on the bulletin boards or Pink Sheets because they are so volatile, illiquid or hard to research, if not all three.
My Keys to Trading
I calculate a fair value for every stock, which is the price at which the stock would trade at in a perfect world. Fair value is not a price target. Fair value is based on the stock's past data and projections for the future. Fair value is based on the trailing 12-month EPS, the forward 12-month estimated EPS and the yield on the 30-year Treasury. How these data points are weighted is based on a historical analysis of the stock's price history with 17 other variables influencing the calculation, based upon its sector and industry group.
Weekly Chart Profile:
A stock with a positive profile has a weekly close above its five-week modified moving average with a rising 12x3 weekly slow stochastic, which is a measure of momentum on a scale of zero to 100. A reading below 20 is oversold, while a reading above 80 is overbought.
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 and that acts 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.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Ditech Communications, Tut Systems, Westell Tech and Entrust to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.