has taken a beating in the first two weeks of October, and this has caused some price discounts for the stocks on the shelves of the Tech Stock Five & Dime. But of the 20 stocks on the shelves, only two are down by 5% or more:
is the biggest loser, down 23.8%;
( ENTU) is not doing as badly, down 5.8%.
The winners so far are numerous:
- Actuate( ACTU), up 5.0%.
Tut Systems( TUTS), up 6.1%.
Lucent( LU), up 6.3%.
Westell (WSTL) - Get Report, up 6.9%.
Ciena (CIEN) - Get Report, up 17.1%.
RealNetworks (RNWK) - Get Report, up an impressive 37.0%.
Not too bad, with the Nasdaq down 4.4% since Aug. 22,
when I started this series.
I've presented the performance of all the "departments" of the Tech Stock Five & Dime in a table below, but first, I'd like to add four new names to the shelves. Whether the market is going up or down, there are values to be found. These qualify, but you should use my guidelines to monitor the risk/reward.
The first addition is
, which makes network infrastructure equipment. At $4.45, its shares are a huge 74.9% undervalued, with a negative weekly chart profile and the five-week modified moving average at $4.49. My monthly value level is $3.11, with a quarterly pivot at $4.75 and quarterly risky level at $6.21.
, which designs and licenses technology that allows digital device users to interact with the devices through their sense of touch. At $6.74, the stock is 67.2% undervalued. It has a positive weekly chart profile, and its five-week modified moving average is at $6.27. My monthly value level is $5.11, with a quarterly pivot at $6.32 and quarterly risky level at $10.44.
is up next; at $4.99, the stock is 55.5% undervalued, with a negative weekly chart profile and the five-week modified moving average at $5.07. My quarterly value level is $3.75, with my quarterly risky level at $6.09.
Squaring the quartet is content management software company
. At $8.74, the stock is 56.4% undervalued. It has a positive weekly chart profile, and its five-week modified moving average stands at $8.33. My monthly value level is $7.71, with a quarterly pivot at $9.03 and quarterly risky level at $11.20.
These cheap valuations are attractive, but before you buy, be aware that my model indicates that it's most prudent to add to positions at a value level, and to book profits on strength to a risky level. For example, a trader who buys at value should consider selling at the nearest pivot.
Also note that Extreme and Sonus have negative weekly charts. This means that these stocks have a better chance of declining before they rise. Immersion and Stellent both have positive weekly chart profiles, so they're less likely to dip in the near term. The goal of my model is to provide a valuation framework that will assist in applying prudent discipline to managing these positions.
Taking Stock of the Inventory
To qualify for the shelves of the Tech Stock Five & Dime, a stock needs to be at least 40% undervalued according to my model. I've defined other aspects of my model below.
12x3 weekly Stoch:
This is the 12x3 weekly slow stochastic reading. A stochastic is a measure of momentum on a scale of zero to 100. A reading of more than 80.0 is overbought (OB), and a reading below 20 is oversold (OS); RM indicates a rising reading, above 20 but below 80; and DM indicates a reading that is declining and below 80 but above 20. It's a sign that a stock has lost its momentum status when the stochastic falls below 80 after having been above it.
The five-week modified moving average, calculated from a simple moving average updated each week by taking the prior sum, subtracting out the prior five-week MMA, adding in the latest weekly close and dividing by five. The MMA is slower than an simple moving average. It's considered a support or resistance (a positive if above, a negative if below)
Value levels, risky levels and pivots:
A value level is a price at which buyers should emerge on share-price weakness, while 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 during its time horizon, and which acts as a magnet during the remainder of that time horizon. These levels are calculated in weekly, monthly (M), quarterly (Q), semiannual and annual (A) time horizons, on the basis of 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.
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.
I calculate this for every stock. It's the price that a stock can trade at in a perfect world. This is not a price target; it is based upon the company's past data and its projections for the future, including its trailing 12-month EPS, the forward 12-month estimated EPS and the yield on the 30-year Treasury. How these data points are weighted depends on an historical analysis of the stock's price history, with some 17 other variables influencing the calculation on the basis of its sector and industry group. My model knows that tech stocks tend to trade at high P/E ratios.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Immersion, Stellent, Actuate, Interwoven, Intellisync, Terayon, Ditech, Tut Systems, Westell, Entrust and WebMethods to be a small-cap stock. 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.