Techs Release Earnings Into Momentum

This market environment makes it vital to know when to sell Google, Time Warner and more.
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The market is becoming a momentum market, not a value market, and investors now are chasing momentum, partying like it's 1999 heading into 2000.

We're heading into some high-profile earnings reports for technology stocks over the next couple of days, and given the current momentum environment of the sector and market, investors will do well to be forewarned and forearmed with value levels and risky levels. (These are my cues for when a stock is good to buy or sell.)

Adversely affecting valuations is the rising 30-year Treasury bond yield, which is at 4.70%, the highest level for 2006. The tech sector is the only sector currently undervalued, according to my model. But right now, it's less than 3.0% undervalued, which is not cheap considering that technology ended 2005 at 10.5% undervalued. By comparison, there are 11 sectors in the U.S. capital markets, and eight are more than 5.0% overvalued:

  • Basic industries, 20.7% overvalued
  • Energy, 18.0%
  • Capital goods, 11.3%
  • Consumer nondurables, 9.2%
  • Public utilities, 9.2%
  • Finance, 8.0%
  • Transportation, 7.3%
  • Consumer services, 5.1%

A stock that's a pure momentum play has a rising or overbought weekly chart profile. When this profile is evident, having a sell stop -- and raising that stop price each week -- provides the sell discipline to protect profits in case share price changes direction. Regardless of the fundamental or technical profiles, my value levels should be used as prices at which to add to a position on weakness, and a risky level should be used as a price at which to reduce a position on strength.

Tuesday's Postclose Reports

Google: At Monday's close at $426.82, Google was rated a hold according to ValuEngine, and was 7.2% overvalued, according to my model, with fair value at $398.04. It has been a volatile month for Google, with shares trading down from $475.11 on Jan. 11 as low as $394.74 on Jan. 24, so the stock held its fair value on weakness.

The company is expected to report EPS of $1.76 this afternoon. According to Thomson/First Call, Wall Street analysts have raised the collective bar for the company, with a median price target of $490 and a high price target of $600.

The weekly chart profile shows declining momentum, with the five-week modified moving average at $423.63. A weekly close below $423.63 would shift the weekly chart profile to negative. My model suggests that the upside on a positive reaction to earnings should be limited to monthly risky levels at $458.06 and $461.87.

An article from Sunday's

New York Post

is worth mentioning here: "Click Fraud Chaos." Click fraud occurs when surfers click on an advertiser's link for no other purpose than driving up the number of hits. Because Google charges advertisers based on the number of hits recorded, this click fraud drives up costs for advertisers. According to the story, Joseph Holcomb, a search marketing expert, claims that Google's revenue would be cut by 30% if the company were able to stop this practice. Google recognizes the issue, but says the impact is very small. Watch for further developments on this issue; headlines could have impact on the stock.

Powerwave Technologies

(PWAV)

: The stock is rated a hold according to ValuEngine, and at Monday's closing price of $14.38, it's a whopping 54.2% undervalued according to my model, with fair value at $31.40. Shares traded as high as $14.55 on Monday in anticipation of a positive earnings report. The company is expected to report EPS of 15 cents. According to Thomson/First Call, Wall Street analysts have a median price target of $15 and a high price target of $16. Powerwave's weekly chart profile shows rising momentum, with the five-week MMA at $13.14. As long as weakness holds my quarterly pivot at $11.45, I show potential upside to my annual risky level at $26.51 this year.

Symantec

(SYMC) - Get Report

: At Monday's close of $18.19, Symantec was 19.0% undervalued, with fair value at $22.46, by my model. The stock is rated a hold according to ValuEngine. It's expected to report EPS of 25 cents. According to Thomson/First Call, Wall Street analysts have a median price target of $25 and a high price target at $30. The weekly chart profile shows rising momentum, with the five-week MMA at $18.50. The 200-week simple moving average of $17.27 has held on recent weakness, with my annual pivot at $19.50 and a second annual pivot at $21.85. These levels should be tested later in the year.

Wednesday's Reports

Business Objects

(BOBJ)

: The stock is rated a hold according to ValuEngine, and at Monday's close of $41.67, was 28.1% overvalued according to my model, with fair value at $32.52. The company is expected to report EPS of 40 cents. According to Thomson/First Call, Wall Street analysts have a median price target of $40 and a high price target at $50. The weekly chart profile shows overbought momentum, with the five-week MMA at $40.45. My quarterly value level is $33.44 with my monthly risky level at $43.28.

Time Warner

(TWX)

: At Monday's close of $17.55, Time Warner was 23.5% undervalued, with fair value at $22.93, according to my model. The stock is rated a hold according to ValuEngine. The company is expected to report EPS of 22 cents. According to Thomson/First Call, Wall Street analysts have a median price target of $22 and a high price target of $25. The weekly chart profile shows declining momentum, with the five-week MMA at $17.51. My quarterly pivot is $16.97 with my quarterly risky level at $19.96.

Updating Two Key Profiles

It's also worth revisiting the profiles of two overvalued tech companies that have already reported, to update their profiles following the market's reaction.

Again, keep in mind that when profiling stocks that are fundamentally overvalued according to my model, it is more important to follow the momentum of the stock's weekly chart profile, and to use my value levels as the prices at which to add to positions on weakness and use my risky levels as the prices at which to reduce positions on strength. Overvalued stocks move higher as pure momentum trades, and can continue to move higher until they reach a risky level. In some cases, the momentum is so strong that risky levels are not yet evident.

Apple

(AAPL) - Get Report

: At Monday's close at $75.00, Apple was rated a hold according to ValuEngine, and was 16.5% overvalued, with fair value at $64.37, according to my model. Shares peaked at $86.40 on Jan. 12 and traded as low as $71.10 on Jan. 27. The weekly chart profile shows overbought momentum, but a close this week below the five-week MMA at $73.33 would indicate the risk of a deeper correction.

So far this year, weakness has held between quarterly pivots at $68.70 and $72.59, but a trend below this range would indicate risk to quarterly and semiannual value levels at $55.43 and $48.01, where long-term investors should consider adding to this position. At $55.43 Apple would become 13.9% undervalued given the same fair value calculation.

According to Thomson/First Call, Wall Street analysts have raised estimates, with a median price target at $92.50 and a high price target at $103.00. My model suggests that they have overshot the fundamentals for Apple at this time. Investors want to buy Apple when it's undervalued, and that would be on weakness to $55.43 and $48.01.

Advanced Micro Devices

(AMD) - Get Report

: Shares traded to a new 52-week high at $41.40 on Monday, making AMD one of the strongest momentum stocks in the tech sector. AMD is rated a hold according to ValuEngine, and remains extremely overvalued, but that's not what we are tracking right now. The weekly chart profile shows overbought momentum with the five-week MMA at $32.82. According to Thomson/First Call, Wall Street analysts have raised estimates with a median price target at $41 and a high price target at $65, so shares have reached the consensus price target. I do not have a risky level at which to reduce holdings at this time, but if there is a price correction following the current parabolic trend, the risk is to my annual value level at $28.61 at some point in 2006. This is a stock where the long-term investor should not add to positions, but should have a sell stop to protect longer-term gains and raise that stop each week as the share price rises.

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.