Editor's Note: Richard Suttmeier is a columnist for TheStreet.com whose Tech Trading Diary appears every Tuesday on TheStreet.com. He is also the author of TheStreet.com Technology Report newsletter. In this special report, he takes readers through how he formulated the strategy for this trade, and then executed it.
as a portfolio holding on April 7, I noted that shares were 41.6% undervalued, compared with 19.2% for the technology sector and 25.8% for the semiconductor industry. With my models showing that TXN had the leadership credentials it was added to the model portfolio at $24.85. The original price target was set at $30.00.
Then on April 18, the day before TI reported its first-quarter earnings, the position was doubled as shares pulled back to my monthly value level at $22.61. My model showed TXN 47.3% undervalued, justifying this decision. I maintained the $30 price target.
On June 23, after noting a weekly risky level at $28.50 I decided to reduce the position by 50%, booking a 15.9% gain on the shares added on April 7.
Finally, on July 26, following a positive reaction to second-quarter earnings, the position was removed from the portfolio because shares were testing a quarterly risky level at $31.86, for a gain of 40.7% vs. the position set at $22.65 on April 18. My model shows TI approaching only 10% undervalued, which was an input to this decision, as I like stocks to be at least 20% undervalued by my measures.
Adding Another Bargain
Originally published April 7, 2005 at 9:09 a.m. EDT
For this service, I am focusing on technology stocks that are at least 20% undervalued. Using variables like the company's 12-month trailing earnings per share and the analyst consensus of the company's future 12-month EPS, my value screen shows that
is 41.6% undervalued, compared with 19.2% for the technology sector and 25.8% for the semiconductor industry. At today's open, I will add 150 shares of Texas Instruments as a long-term holding to the model portfolio.
Semiconductor firm Texas Instruments reported that for the fiscal year ended Dec. 31, 2004, its revenue rose 28% to $12.58 billion, while net income increased 55% to $1.86 billion. The company says the increase in revenue reflects growth in its wireless and digital light processing semiconductor products, while its gains in net income are indicative of better operating margins and lower operating expenses.
In beginning this long-term technology stock portfolio, I am focusing on the industry leaders involved in product innovations that should increase revenue. Wednesday, Texas Instruments introduced a pair of high-speed, high-precision analog-to-digital converters. The company says these new products are "ideal" for measurement applications in scientific instrumentation, automated test equipment, data acquisition, medical imaging and vibration analysis. This type of innovation should help the company spur more growth going forward.
On Wednesday, Texas Instruments closed at $24.73 per share. I'm setting a price target of $30.00 per share, a price it should reach within the next three to six months.
Building a Position
Originally published April 18, 2005 at 9:34 a.m. EDT
In Friday's Weekly Summary, I indicated I would add 150 shares of Texas Instruments on a pullback to $22.61, the next monthly value level from my proprietary models. With the stock 47.3% undervalued and shares now trading at $22.52, I am adding 150 shares to my long-term position in the model portfolio right after you receive this alert.
This addition increases this position to 300 shares; I initially purchased 150 shares at $24.85 at the market open April 7. My price target remains $30.00 per share, a price the stock should reach within the next three to six months.
The company reports first-quarter earnings after the close today, and analysts expect it to earn 23 cents a share. On Friday, it was reported in the media that Texas Instruments is expecting growing demand in processors for high-end cell phones and chips for digital televisions in Japan. Last month, the company lowered profit and sales estimates, but it now views this slowdown as temporary. Texas Instruments cell-phone chips are now in every third-generation handset offered by
, Japan's top mobile-phone company.
Signs of Renewal
Originally published April 19, 2005 at 8:53 a.m. EDT
Earnings news is boosting a couple of model portfolio stocks this morning. I want to pass along this news to you, but I am not taking any action in this alert.
Texas Instruments beat analysts' first-quarter earnings estimates by a penny, reporting 24 cents a share after the bell Monday, despite flat revenue year over year, and an overall slowdown in the semiconductor market. The stock rallied 6% in after-hours trading to $24.30 per share.
At Monday's open I purchased 150 shares of Texas Instruments at $22.65, anticipating a positive reaction to earnings. Initially, I bought 150 shares April 7 at $24.85. This now gives me a total of 300 shares of TI in the long-term model portfolio with a price target of $30.00 per share, a price the stock should reach within the next three to six months.
The company said higher capacity utilization and lower costs helped increase profits. In addition, management indicated that the high inventories that began to build last fall at semiconductor distributors appear to be cleared out.
Texas Instruments was optimistic about sales of components for cell phones. This was one of the product segments where I was looking for positive guidance from the company. Demand for wireless applications around the world, with increasing demand for components and products from Texas Instruments, shows that shares can rally further, particularly given my continued screens, which show the stock 47.4% undervalued at Monday's $22.92 closing price.
Also, this morning
reported first-quarter earnings of 11 cents a share, in line with consensus estimates. The company was upbeat, citing strong performance in its software-licensing and maintenance businesses.
EMC CEO Joe Tucci said in an interview on
this morning, right after the earnings announcement, that all business segments experienced year-over-year double-digit growth, with software and services up 26%. When asked about competitive pressures from the alliance between
, Tucci said that EMC had an extended deal with
, and soon will be partnering with
. Good partners, good products keep EMC the clear industry leader in storage applications.
This clear and positive guidance pushed EMC shares up 5.9% in premarket trading to $12.15, keeping the stock on track to achieve my price target of $14 per share, a price I project for the stock within six months. For now, I will maintain the short-term model portfolio position of 300 shares, which I bought at $12.32 at the April 13 market open.
Originally published June 23, 2005 at 9:50 a.m. EDT
After you receive this alert I will be booking profits on half of my position in Texas Instruments. I added 150 shares at $24.85 on April 7 and then added another 150 shares at $22.65 on April 14. I am taking profits in the first lot with shares of TI trading at my weekly risky level at $28.50. (A risky level is a price at which investors are likely to reduce holdings, according to my models.)
My price target for the balance remains my monthly risky level at $30.13.
A Nice Run
7/26/2005 9:35 AM EDT
Texas Instruments has been in the model portfolio since April 18, and once you receive this alert I am closing this position for a 40% gain.
Shares are trading between two quarterly risky levels at $31.86 and $33.10, and I expect long-term investors to reduce holdings within this price area. In addition, at $33.10, shares would be only 10% undervalued, according to my model. My aim is to invest in stocks that are at least 20% undervalued.
After the close on Monday, TI reported EPS of 32 cents, beating the consensus estimate by 3 cents. Quarterly revenue was $3.239 billion, which also topped the consensus of $3.19 billion. Sales were up 9% sequentially from the first quarter, driven by increased demand for analog and digital signal semiconductor products. With shares approaching only 10% undervalued, this good news appears to be built into current market prices.
P.S. As a reminder, I will be adding an additional 175 shares of
on weakness to my monthly value level at $22.74. (The value level is a price at which buyers should re-emerge.)
This morning, my model shows Juniper 58.8% 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 my price target in the second half of 2005.
At the time of publication, Suttmeier was long Juniper Networks.
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.