On Dec. 1, I profiled 10 Tech Buys and 10 Sells for Year-End. The basis for the column was that strong stocks tend to trade higher into year-end, and that weak stocks tend to trade lower into year-end. The prudent long-term investor can use the opportunity to book profits on overvalued stocks as they trade higher, and to buy undervalued stocks as they slide lower.
Monday I set my screen to find technology stocks rated a sell by my modelthat are at least 40% overvalued. The companies I am profiling arenot names on everyone's lists -- some are small-caps, but all have a positiveweekly chart profile. What this means is that the share prices for thesestocks have been moving higher, but share-price strength is not justifiedby the fundamentals.
My advice to long-term investors is at least to avoid investing new moneyinto these companies. Check your portfolios; if you own these stocks, usethe trading levels as guidance on when and at what price to liquidate theseshares. Investors in these stocks should sell 25% to 50% of their positionnow, and then review the names again in early 2006.
Before we get to the nine overvalued stocks, let's review my three-prongedapproach to trading and investing:
: I calculate a fair value for every stock,which is the price at which a stock can trade in a perfect world. Fairvalue is not a price target; fair value is based on a stock's past data andprojections for the future, including the trailing 12-month EPS, theforward 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 thestock's price history along with 17 other variables that influence thecalculation based on the stock's sector and industry group. These variablesalso provide a rating that I have chosen to keep in the background untiltoday's alert. The ratings are: strong buy, buy, hold, sell and strong sell.It is a bell-shaped curve of some 6,000 stocks that I screen usingvaluengine.com. Most stocks are in the middle of the curve as a hold. Only2% 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 ascale of zero to 100. A reading above 80 is overbought. A stock with anegative profile has a weekly close below its five-week MMA with adeclining 12x3 weekly slow stochastic. A reading below 20 is oversold.
Value Levels, Risky Levels and Pivots
: A value level is a priceat which buyers should emerge on share-price weakness. A risky level is aprice at which sellers should reduce holdings on share-price gains. A pivotis a value or risky level that was violated in its time horizon, acting asa magnet during the remainder of that time horizon. These levels arecalculated in weekly, monthly, quarterly, semiannual and annual timehorizons, based on the past nine closes in each time horizon. My theory isthat the closes over a nine-year period are the summation of all bullishand bearish events for that market or specific stock. At the end ofDecember, the closes will provide new monthly, quarterly, semiannual andannual value levels, risky levels and pivots, which will be important inmeasuring the risky/reward for shares in the first half of 2006.
Nine Names to Set for Sale
develops silicon-based digital moving-picture decoders forconsumer appliances and commercial systems. The stock is rated sell, andis 83.7% overvalued. Its weekly chart profile is positive, with thefive-week modified moving average at $12.70. This stock can continue to seenew 52-week highs as long as any selling holds at my semiannual valuelevels at $10.98 and $10.82. Shares were recently trading at $14.40.
publishes interactive entertainment software games. Sharesare 177.2% overvalued and the weekly chart profile is overbought with thefive-week modified moving average at $20.75. This stock can continue totrade higher as long as my monthly and quarterly value levels stand firm at$19.69 and $18.08. Shares were recently trading at $22.95.
offers customer relationship management, or CRM, software. Thestock is 48.2% overvalued and the weekly chart profile is overbought withthe five-week modified moving average at $17.39. This stock can continue totrade higher, but beware that my monthly value levels are well below whereshares are trading at $14.24 and $12.54. Shares were recently trading at$20.03.
provides on-demand customer relationship software. Itsshares are 75.5% overvalued with an overbought weekly chart profile. Thefive-week modified moving average is at $30.40 and my monthly value levelis $26.82 with a monthly pivot at $31.64. Shares were recently trading at$34.97.
develops customized software products for the health careindustry in the U.S. Trizetto is 61% overvalued. Its weekly chart profileis positive with the five-week modified moving average at $16.17. Myquarterly value levels are $12.80 and $11.86 with monthly risky levels at$18.65 and $19.77. Shares were recently trading at $16.86.
provides chip interface products that link other chipstogether. Its stock is 81.9% overvalued. The weekly chart profile ispositive with the five-week modified moving average at $15.02. My monthlyvalue level is $12.71 with my semiannual pivot at $17.36 and quarterlyrisky levels at $20.45 and $21.82. Shares were recently trading at $16.62.
is 100.1% overvalued. The weekly chart profile is overboughtwith the five-week modified moving average at $19.18. My monthly valuelevels are $18.78 and $18.67 with my quarterly pivot at $20.78 andquarterly risky level at $23.86. Shares were recently trading at $21.15.
provides open-source operating and is 52.9% overvalued. Theweekly chart profile is overbought with the five-week modified movingaverage at $23.31. My monthly value level is $20.71 with quarterly pivotsat $24.81 and $24.84. Shares were recently trading at $24.40.
owns and operates towers for wireless communications. Thecompany leases antenna space on its towers that accommodate multipletenants. Crown Castle is rated a sell and is 57.3% overvalued. The weeklychart profile is positive, with the five-week modified moving average at$26.62. My quarterly value level is $23.42 with a monthly risky level at$29.43. Shares were recently trading at $27.30.
Please note that due to factors including low market capitalizationand/or insufficient public float, we consider Sigma Designs to be asmall-cap stock. You should be aware that such stocks are subject to morerisk than stocks of larger companies, including greater volatility, lowerliquidity and less publicly available information, and that postings suchas 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.