Protect Profits in Software

This is yet another hot tech group that isn't as cheap as it was in 2005, so pare back.
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This week, I've profiled

consumer device stocks and

Internet-related names and focused on the momentum in the

chipmakers. There's one more hot subsector to profile that's not as cheap as it was in 2005: software.

Technology stocks in general aren't as cheap as they were, but the sector is the only one that's currently undervalued according to my model. Technology is now undervalued by 4.6%, down from being 10.3% undervalued at the end of 2005. Software stocks have seen a more dramatic shift. They were 19.9% undervalued in May vs. just 5.5% undervalued now.

Accordingly, it looks like the right time to reduce positions in most of the stocks that I've profiled in this sector. (If you're not already familiar with my criteria for selecting and evaluating stocks, please read over the section at the end of this column on the metrics I use.)

When you trade and invest in software companies, focus on the positive but overbought weekly chart profiles, not the weakening fundamentals, to stay with the upward momentum for these stocks. This will make stock selection particularly tough for the long-term investor, who usually considers weakening fundamentals something that can't be ignored. The stocks with a sell rating, but without a risky level at which to sell on strength, should be monitored to sell on weakness on sell stops below the pivots shown. Stocks that are rated a buy or hold can be bought on weakness to a pivot or value level, and sold on strength to a risky level. There is no need for action at marker levels when this column is posted.

Akamai

(AKAM) - Get Report

is rated a sell by ValuEngine and is 80.7% overvalued, with fair value at $12.68. The weekly chart profile is overbought, with the five-week modified moving average (MMA) at $20.60 and the 52-week high set intraday during this session, at $23.97.

Long-term investors should consider reducing this position by 25% on strength to my quarterly risky level at $24.74 or consider a sell stop on a close below my monthly pivot at $21.39.

Business Objects

(BOBJ)

is rated a hold by ValuEngine. The stock is 29.5% overvalued with fair value at $32.71. The weekly chart profile is overbought, with the five-week MMA at $40.26 and the 52-week high at $43.07, set Jan. 6.

As with Akamai, long-term investors will want to consider reducing this position by 25%. Look at placing a sell stop below my monthly pivots at $42.28 or $38.95, depending on your risk tolerance.

Click Commerce

(CKCM)

has a brighter picture: It's rated a buy by ValuEngine and is 50.6% undervalued, with fair value at $52.00. The weekly chart profile has rising momentum with the five-week MMA at $23.17.

Long-term investors, consider buying weakness to my quarterly pivot at $23.53. If you are looking to book shorter-term gains, consider reducing longs on strength to my monthly risky level at $26.35, which was tested this morning before I posted this profile. Above is the potential for shares to trade up to its 52- week high at $29.20.

Midway Games

(MWY)

is rated a sell by ValuEngine. The stock is 89.1% overvalued with fair value at $9.05; the stock peaked at a 52-week high of $23.54 on Dec. 13. Its weekly chart profile has declining momentum with the five-week MMA at $19.28.

I see risk to lower levels remaining here as long as strength fails at or below my quarterly pivot at $18.93. The only technical support I can denote today is the stock's 200-day simple moving average at $14.54.

Red Hat

(RHAT)

is rated a hold by ValuEngine and is 68.0% overvalued, with fair value at $18.35. The weekly chart profile is overbought with the five-week MMA at $27.03. Red Hat made a fresh 52-week high just this Wednesday, of $31.05.

Long-term investors should consider reducing longs by 25% on a sell stop below my monthly pivot at $28.74.

RightNow Technologies

(RNOW)

is rated a sell by ValuEngine and is 39.8% overvalued, with fair value at $14.27. Its weekly chart profile is overbought, with the five-week MMA at $18.18 and the 52-week high set "right now," during today's session at $20.83.

Long-term investors should consider reducing positions on a sell stop below my monthly pivot at $19.77.

RSA Security

(RSAS)

is rated a hold by ValuEngine. The stock is 31.5% undervalued with fair value at $21.47. The weekly chart profile is positive, with the five-week MMA at $12.70 and the 200-week simple moving average at $12.33.

Long-term investors should consider adding to this position on weakness to my monthly pivot at $13.56. If you are looking to book shorter-term gains, consider reducing longs on strength to my quarterly risky level at $17.65.

Salesforce.com

(CRM) - Get Report

rates a sell with ValuEngine and is 70.6% overvalued with fair value at $22.43. The weekly chart profile is overbought, with the five-week MMA at $33.98 and the 52-week high at $40.15, set Jan. 6.

Long-term investors should consider reducing positions on a sell stop below my monthly pivot at $36.15.

Trizetto Group

(TZIX)

is rated a sell by ValuEngine. It's 53.7% overvalued with fair value at $11.24. The weekly chart profile is overbought with the five-week MMA at $16.81 and the 52-week high at $17.81, set Jan. 9.

Long-term investors should consider reducing this position by 25% on strength to my monthly risky level at $19.93.

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).

P.S. For those interested in hearing thoughts on 2006 from me and

RealMoney's

Cody Willard, James Altucher and Lenny Dykstra,

click here

to sign up for SIRE's annual banquet.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Click Commerce 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

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 --

click here

to send him an email.