- Actuate ( ACTU), up 5.0%. Tut Systems ( TUTS), up 6.1%. Lucent ( LU), up 6.3%. Westell ( WSTL), up 6.9%. Ciena ( CIEN), up 17.1%. RealNetworks ( RNWK), up an impressive 37.0%.
New MerchandiseThe first addition is Extreme Networks ( EXTR), 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. Next is Immersion ( IMMR), 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. Wireless play Sonus Networks ( SONS) 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 Stellent ( STEL). 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 InventoryTo 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.
|The Stocks on the Shelves|
|Company Name||Date Posted||Price Close||High Trade||% to High||Price 10/13/2005||Gain/Loss||Undervalued||12x3 Stoch||5-Week MMA||Value Level||Pivot||Risky Level|
|Stocks $1 to $3|
|Actuate (ACTU:Nasdaq)||8/22/2005||$2.38||$2.70||13.40%||$2.50||5.00%||57.70%||RM||$2.47||2.14 Q||3.17 Q|
|Lucent (LU:NYSE)||8/22/2005||$2.87||$3.49||21.60%||$3.05||6.30%||57.70%||DM||$3.11||2.62 M||4.47 Q|
|Ciena (CIEN:Nasdaq)||8/22/2005||$2.11||$2.90||37.40%||$2.47||17.10%||74.90%||RM||$2.39||2.13 Q|
|Stocks $3 to $5|
|Lucent (LU:NYSE)||9/7/2005||$3.18||$3.49||9.70%||$3.05||-4.10%||57.70%||DM||$3.11||2.62 M||4.47 Q|
|Intellisync (SYNC:Nasdaq)||9/7/2005||$4.05||$4.89||20.70%||$4.05||0.00%||60.30%||DM||$4.04||3.23 Q||4.64 M|
|Terayon Comm (TERN:Nasdaq)||9/7/2005||$3.40||$4.10||20.60%||$3.40||0.00%||39.80%||DM||$3.47||3.45 M||4.16 Q|
|Stocks $5 to $10|
|Interwoven (IWOV:Nasdaq)||9/6/2005||$8.40||$8.61||2.50%||$8.35||-0.60%||74.60%||RM||$8.11||7.63 Q||10.17 Q|
|Micromuse (MUSE:Nasdaq)||9/6/2005||$6.96||$8.04||15.50%||$7.25||4.20%||61.10%||RM||$6.87||5.98 M||7.00 M|
|RealNetworks (RNWK:Nasdaq)||9/6/2005||$5.41||$8.50||57.10%||$7.41||37.00%||12.40%||RM||$5.82||5.07 Q|
|Ditech Comm (DITC:Nasdaq)||9/21/2005||$6.79||$6.90||1.60%||$6.63||-2.40%||39.30%||DM||$6.86||4.25 M|
|Tellabs (TLAB:Nasdaq)||9/21/2005||$9.50||$10.73||12.90%||$9.60||1.10%||40.40%||DM||$9.55||8.15 M||10.37 M|
|Tut Systems (TUTS:Nasdaq)||9/21/2005||$3.10||$3.39||9.40%||$3.29||6.10%||74.60%||RM||$3.18||2.63 M||4.68 S|
|Westell Tech (WSTL:Nasdaq)||9/21/2005||$3.64||$4.00||9.90%||$3.89||6.90%||30.90%||OS||$3.96||3.27 A||5.69 S|
|Gateway (GTW:NYSE)||9/21/2005||$2.60||$2.90||11.50%||$2.57||-1.20%||74.20%||OS||$2.83||2.23 M||2.80 Q||5.47 Q|
|SunMicro (SUNW:Nasdaq)||9/21/2005||$3.94||$4.56||15.70%||$3.96||0.50%||27.90%||DM||$3.93||3.40 M||3.66 Q||5.14 Q|
|Skyworks (SWKS:Nasdaq)||9/21/2005||$6.84||$7.16||4.70%||$5.21||-23.80%||69.10%||DM||$6.68||4.36 M||6.07 M||7.74 Q|
|Entrust (ENTU:Nasdaq)||9/21/2005||$5.51||$5.69||3.30%||$5.19||-5.80%||43.10%||DM||$5.58||3.76 Q||5.44 M||6.17 M|
|BEA Systems (BEAS:Nasdaq)||9/23/2005||$8.43||$9.04||7.20%||$8.26||-2.00%||52.00%||DM||$8.69||6.57 Q||7.98 M|
|Sapient (SAPE:Nasdaq)||9/23/2005||$6.37||$6.70||5.20%||$6.11||-4.10%||47.40%||OS||$6.59||6.71 M||9.97 Q|
|WebMethods (WEBM:Nasdaq)||9/23/2005||$6.45||$7.27||12.70%||$6.32||-2.00%||43.20%||DM||$6.55||4.51 M||6.38 Q|
|Source: Global Market Consultants|
Guidelines for Price LevelsLow-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 TradingFundamental Screens: 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. Fair value: 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.