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5 tech stocks you hate to love
Once again, investors have turned on tech stocks. But the last time that happened a rally followed. It could happen again.
By Jim Jubak
Technology stocks may just be hated enough now to power a short-term rally.
After a battering in January took the Nasdaq down 5%, and after the sector just couldn't get on track in February as the Nasdaq fell another 1%, investors hate the sector almost as much as they did last September.
And you remember what happened at the end of 2004, don't you? From that base of extremely negative sentiment, the Nasdaq climbed 15% in October, November and December.
The current negative feeling about the sector matches last September's pessimism, according to Phil Erlanger, editor of Erlanger Squeeze Play. Short-interest on the Nasdaq jumped 6.3% last week, which puts the number of short positions back near the level at the end of the third quarter. And since a short position means that some investor is betting that a stock or the market will fall, heavy shorting provides potential fuel for a rally because investors who're short will have to buy shares if the market starts to climb.
This level of pessimism sets up another opportunity for short-term profits. Investors who have the discipline to buy now and sell in a few months when investors start to get giddy about the sector again have a good shot at replaying the fourth-quarter's gains. But this isn't time to fall in love with the sector. The problems bedeviling technology stocks, such as falling profit margins, haven't gone away. You want to trade these stocks, not marry them.
Telling a story
Here are the three stock recommendations I made when I appeared on CNBC's "Morning Call" Wednesday.
SanDisk (SNDK, news, msgs) is a leader in the volatile flash-memory chip market. Revenue growth has been extremely healthy of late -- up about 65% in 2004 -- but the problem has been profit margins. New producers entering the sector have pushed down average selling prices even faster than revenue has climbed. Those pressures aren't likely to let up this year, but the strength of the company's story makes this a stock to play for any short-term rally.
Flash memory is ubiquitous, being used in everything from digital cameras to digital music players. Can you think of a better way to profit from the explosion in consumer electronics that require silicon-based storage? Our StockScouter rated the stock a 7 out of a possible 10 on March 2.
Play the music
Sigmatel (SGTL, news, msgs) is another technology story stock, and that could put it at the front of any rally. It's the No. 1 supplier of flash-memory chips to the MP3 player market. (The flash memory-based MP3 market is about 70% of the total digital music player market. The other 30% belongs to hard-disk-drive players like Apple Computer's (AAPL, news, msgs) iPod.)
Flash-based MP3 shipments were forecast to have hit 30 million units in 2004 and to grow to 50 million this year. Longer term, the company faces falling prices as new competitors battle for market share in these fast-growing markets. Sigmatel expects its gross profit margin to decline to 50% from the current 55%. Our StockScouter rated the stock a 3 on March 2.
MicroStrategy (MSTR, news, msgs) makes business intelligence software. What's that? It lets managers analyze and share data throughout a company so that they can identify trends and develop business strategies. The company returned, solidly, to the black last year, with operating earnings of $4.21 a share after a loss of 17 cents a share in 2003. Wall Street analysts project that earnings per share will increase by 21% and 20% in the year's first two quarters, respectively. Our StockScouter rated the stock an 8 on March 2.
Exclusive picks
And here are two exclusive picks for CNBC.com on MSN readers.
Broadcom (BRCM, news, msgs) has had a new CEO, Scott McGregor, for just about two months now, and I'd never want to underestimate the power of a change in management team to get the ol' juices of optimism flowing.
Broadcom has a lot cooking on the product front too. There's a new chipset to convert analog TV signals into either analog or digital TV output. That's not a bad place to be in the market as the demand for digital TV continues to ramp up. Broadcom estimates that 27 million of the 170 million TVs that will be sold in 2005 will be digital. The company announced a big contract with Ionka, the No. 2 maker of TVs in China. And finally there's a chipset that would enable telephone companies to deliver cable TV-like video functions over DSL phone lines. Our StockScouter rated the stock a 5 on March 2.
MEMC Electronic Materials (WFR, news, msgs) is one of the four leading suppliers of silicon wafers, the foundation of all computer chips. Pricing in the wafer market firmed in 2004 and the trend looks likely to continue this year. That's part of a continuing consolidation in the wafer-supply sector that has seen the number of suppliers drop from six suppliers each claiming 10% of the market 10 years ago to 10 suppliers with four having 10% shares today.
The company's gross profit margin climbed 6.5 percentage points in 2004, Standard & Poor's calculates, and will climb another 1.9 percentage points this year. Investment firm Texas Pacific Group owns about 63% of the company's common stock. Our StockScouter rated the stock a 10 on March 2.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak didn't own or control any shares of the equities mentioned in this column. He doesn't own short positions in any stock mentioned in this column.
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