Connect to Home Networking Stocks

Get exposed to the next growth area in tech with some familiar, and undervalued, names.
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One of the investment themes I like this year is stocks that should benefit from an emerging segment of the economy, home networking. Home networking appears to be one of the newer developments worth your investment dollars. Telecom providers are updating access to the Internet to make it faster, safer and cheaper for consumers. Consumers seek the latest technology to get online at home through high-speed Internet access and take advantage of the evolving digital world. Bundled services such as VoIP, cable television and high-speed access are on the consumer wish list.

Cisco

(CSCO) - Get Report

is the name that tends to be connected to this investment thesis first, a perception the company encourages: CEO John Chambers said in an interview on

CNBC

this morning that all forms of communications in the home can converge on Cisco's technology. It supplies the routers and switches for telecom service providers to give passage to an improved Internet superhighway. In the company's recent earnings report, Cisco management was upbeat about all business segments, but it's banking on the consumer market to help increase revenue growth.

The company is doing well already. Last night, the company reported EPS of 26 cents for its second quarter, beating the consensus by a penny. Net sales, at $6.6 billion, also beat estimates of $6.617 billion. Shares traded higher in after-hours, gaining a buck to $19.10.

Going forward, Cisco will try to combine products and services from

Scientific-Atlanta

(SFA)

with smaller versions of Cisco networking gear designed for the consumer. The purchase of Scientific-Atlanta should be closed by the end of the quarter. Cisco's strategy is to dominate home networking, just as it dominates the market for telecom routers and switches as consumers flock online for new digital applications and content.

These plans were not reflected in Cisco's most recent quarterly earnings, and I believe it's unlikely the stock will forge outside the boundaries of its 52-week range, $16.83 to $20.25, anytime soon, but slow and steady may just win for investors. At Tuesday's close of $18.09, Cisco was trading 13.7% below its fair value of $20.94, and it's rated a hold by ValuEngine. The weekly chart profile shows flat momentum, with the five-week modified moving average at $18.19 on top of the 200-week simple moving average at $18.08. A close above both moving averages would shift the weekly chart profile to positive, indicating upside to my quarterly risky level at $20.61.

With the fundamentals neutral and with the technicals potentially positive, it's unlikely Cisco will trend below my monthly value level of $16.83, which is right on the 52-week low. My advice: Trade the range, between $16.83 and $20.61. This may not be exciting, but is more likely to yield profits than trading the overvalued tech socks I

profiled Tuesday,

Apple

(AAPL) - Get Report

and

Google

(GOOG) - Get Report

, which have taken 20% haircuts lately.

In addition to Cisco, there are several other familiar names that I would add to a portfolio to benefit from the growth of home networking with their products, services, gadgets and content which can be integrated into the digital home:

AT&T

(T) - Get Report

: The biggest of the surviving Baby Bells is the nation's largest telecom service provider, and is experiencing strong growth in wireless, broadband and business services. AT&T is already in many homes, and recently dropped the introductory price for its high-speed DSL service to $12.99 per month.

In March, AT&T will launch its new video service Lightspeed, which will offer 300 TV channels, 45 music channels and video-on-demand, in 21 cities by the end of 2006. This, plus AT&T's 60% stake in the nations No. 1 cell-phone service, Cingular Wireless, makes shares a natural fit for home networking exposure. Last week, AT&T said it had underestimated the benefits of its merger with

SBC

(SBC)

, and forecast an annual savings of $1.2 billion by 2008, with the merger adding 30 cents a share to earnings in 2008. This progress is more than a year ahead of previous forecasts.

AT&T is trading above its 200-week simple moving average of $25.05 for the first time since 2001. The stock is rated a buy by ValuEngine. By my model, the stock is currently 36.4% undervalued with fair value at $41.71. The catalyst of Lightspeed plus AT&T's huge presence in the market and its undervaluation add up to a promising home networking play.

Dell

(DELL) - Get Report

: Dell makes servers, storage devices, workstations and printers in addition to PCs. The company also offers consumer electronics such as flat-panel televisions and MP3 players. Analysts expect Dell to report EPS of 41 cents on Feb. 16, and after its two consecutive disappointing quarters, I believe results will show a recovery. A promising indication: In this week's

Barron's

, the Gadget of the Week was the Dell XPS 600, built around Intel's 3.20-gigaherz dual-core processor with the latest graphics card, which includes up to three hard drives and a built-in television.

Dell is rated a hold according to ValuEngine, and according to my models, it's 29.0% undervalued, with fair value at $40.53. The weekly chart profile shows declining momentum, with the five-week modified moving average at $30.35 and the 200-week simple moving average at $32.93. I show a monthly value level at $26.81, with monthly and quarterly risky levels at $34.27 and $36.94.

Intel

(INTC) - Get Report

: Intel is the world's leading chipmaker, and the next generation of Apple iMacs and notebooks with Intel's chips are now appearing on store shelves. Intel's duel-core processors for the Viiv platform for home networking will make the company either a partner with or a competitor to Cisco.

Intel is rated a hold by ValuEngine, and is 23.5% undervalued by model, with fair value at $27.59. The weekly chart shows declining momentum with the five-week MMA and the 200-week SMA converged at $23.75 and $23.74. The five-week MMA is likely to decline below the 200-week SMA, which would be a negative and should cap any near-term rebounds for share price. My semiannual value level is $19.66, with monthly and quarterly pivots at $22.19 and $23.41, respectively, and a new monthly risky level at $26.90.

Time Warner

(TWX)

: Its America Online unit has forged alliances with several telcos, including AT&T, to launch a high-speed access version of AOL. This fits my theme, not only for the quality of the AOL product, but also for the Time Warner content.

Time Warner rates a hold with ValuEngine. My model puts it at 18.8% undervalued, with fair value at $22.45. The weekly chart profile shows rising momentum, with the five-week MMA at $17.63; the 200-week SMA provides support at $16.18. My quarterly pivot is $16.97, with monthly pivots at $17.73 and $18.29, and a quarterly risky level at $19.96.

My Metrics Explained

I evaluate the U.S. capital markets and profile all sectors, industries or specialty groups of companies. There are more than 6,000 stocks in my database.

Remember that when investing and trading in the U.S. capital markets and specific stocks, decisions should be made only after evaluating both fundamental and technical considerations. It is also equally important to manage risk/reward by having levels at which to buy on weakness and sell on strength. The way to do this is to enter limit orders to buy at a price below the market, or to sell at a price above the market.

Combining fundamentals and technicals is like trying to mix oil and water, but I believe it is necessary to do so, to the best of your ability. The levels at which to buy or sell can be used regardless of the fundamentals or technicals.

My discipline involves a three-pronged approach to measuring the risk/reward for trading or investing:

Fundamental

I use ValuEngine to define my fundamental ratings.

Strong buy

: Long-term investors should start a position now.

Buy

: Buy on weakness to a value level.

Hold

: Add to an existing position on weakness to a value level, and reduce an existing position on strength to a risky level.

Sell

: Reduce on strength to a risky level.

Strong sell

: Liquidate now as a source of funds.

Weekly Chart Momentum

This approach measures the technical strength of a stock.

Overbought

: 12x3 weekly slow stochastic above 80 on a scale of zero to 100.

Rising

: 12x3 weekly slow stochastic rising above 20, but below 80.

Flat

: 12x3 weekly slow stochastic not rising or declining, but between 20 and 80.

Declining

: 12x3 weekly slow stochastic is declining below 80, but above 20.

Oversold

: 12x3 weekly slow stochastic is below 20 on a scale of zero to 100.

Key Technical Levels

I identify these as a price at which to buy on weakness and at which to sell on strength.

Moving averages on daily charts

: The 21-day, 50-day and 200-day simple moving averages (SMAs).

Moving averages on weekly charts

: The five-week modified moving average (MMA) and the 200-week simple moving average (SMA).

Value levels and risky levels

: My model includes proprietary analytics that evaluate the past nine closes in several time horizons: weekly (W), monthly (M), quarterly (Q), semiannually (S) and annually (A).

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

TheStreet.com Technology Report

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 --

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to send him an email.