Jubak's Journal Recent articles: • Airlines and the epidemic of risk, 9/30/2005 • 3 oddball oil companies primed for profits, 9/28/2005 • A double hit to the Gulf -- and the economy, 9/27/2005 More... | Jubak's Journal 5 double-your-money tech survivors These stocks have been through the wringer since the tech wreck, and the risks remain high. But each could double by the end of the year. By Jim Jubak Companies like Lucent Technologies, JDS Uniphase and Vitesse Semiconductor -- all still struggling survivors of the great tech wreck of 2000 -- have turned so many corners their stocks should be on wheels. Over the last five years and counting, each pick-up in sales has been a momentary blip followed by another collapse in growth. Each reorganization has promised a return to black ink from red, but each has been followed by another wave of cost-cutting as revenues continued to decline. So it's with trepidation that I say this, but right now I think the stocks of five of these companies, each selling for way less than $5, are solid speculative buys. They're cheap. They'll soon have the wind of the end-of-the-year technology rally at their backs. And -- here's the wild part -- I think there are signs of real and sustainable improvement.
These stocks aren't for the weak of heart and, remember, a $3 stock can still cost you half your money if it drops to $1.50. But balancing that risk, I think investors stand a reasonable chance at getting a double out of these five stocks by year-end. The stocks? Lucent Technologies Lucent Technologies I listed Lucent Technologies first, not because it's my top pick of these five, but because it illustrates what an investor is looking for in a $5 technology stock. First, Lucent's chart clearly shows the kind of base-building that an investor likes to see before buying. The shares hit a 52-week high of $4.16 back in November 2004 and a low in April 2005 at $2.35. But investors who are buying now have the comfort of the solid base the stock has built at around $3 a share. Positive news has started to emerge in the telecommunications technology sector in the last quarter or two. In the second quarter, capital spending by U.S. carriers came in above Wall Street expectations as the largest of what used to be called the regional Bells, Verizon Communications Related news and commentary on MSN Money
Besides such general growth in a company's addressable market, I'd like to see growth in the specific segments that the company has targeted with its products. So, for example, it's good news for Lucent that Sprint Nextel The other four stocks on this list fit well into this general paradigm. Three of the four -- Vitesse, Conexant and Anadigics -- show surprisingly strong StockScouter ratings (7, 7 and 8, respectively) that signal their technical and fundamental momentum. Vitesse Semiconductor Frankly, I'm surprised that Vitesse survived the tech wreck of 2000. The shares suffered an even more spectacular plunge than Lucent's, falling from a high of $106 in March of 2000, compared to Lucent's high of $82 in December 1999. And, as a much smaller company, Vitesse had to scramble harder to find cash when sales collapsed from $442 million in fiscal 2000 to $156 million in fiscal 2003. I wouldn't say Vitesse is completely out of the woods. It looks likely that revenue will dip in the fiscal year that ended Sept. 30, 2005, from fiscal 2004. But the company's new products do seem to be gaining sales. In the third quarter, revenue from new products increased by 26% from the second quarter. Most of this comes from new Ethernet local-area-networking chips. New chips for the company-wide storage market are expected to ramp up in the second half of calendar 2005. The company now projects that new products will account for about 50% of quarterly revenue by the middle of 2006. That depends, of course, on Vitesse getting these new products to market on schedule: The production ramp up of some of its storage products was recently delayed from the September to the December quarter. (Note that the company's CEO bought 10,000 shares of Vitesse stock in August.) Conexant Systems If Conexant can deliver on its projection of a return to the black in the December quarter, that ought to be enough to get the stock moving from the very long base shares have built near $2. In the June quarter, revenue increased 16% from the second quarter. The biggest contribution to growth came from the company's DSL division, where revenue climbed by more than 20% from the prior quarter. Gross margins have started to climb as sales volume picks up and the company cuts costs -- again. The company is now forecasting gross margins of 39% in the September quarter from an average of 34% over the last 12 months. Anadigics Anadigics is perhaps the riskiest of my gang of five -- but also potentially the most profitable. In mid-September, Anadigics raised its guidance for the September quarter that closed last week. Thanks to stronger-than-expected sales in the wireless-phone global-system market, the company said it expected sequential sales growth of about 20%, up from the 10% growth that the company had been projecting. That would still leave the company looking at a loss of 20 cents to 21 cents a share for the quarter. The big obstacle preventing the company from reaching profitability is a state-of-the-art semiconductor fab (or factory, if you don't speak techie) that it finished building in 2001, just in time for the collapse of sales. At the company's current sales levels, the factory is running at just 35% to 40% of capacity. With that millstone around its neck, it's no wonder that Anadigics lost $1.65 a share in 2003, $1.32 a share in 2004 and 61 cents a share in the first two quarters of 2005. But Wall Street now believes that the company will put that factory on the market, much as LSI Logic A shutdown or spin-off of the fab would, says Think Equity Partners, give the company $10 million to $15 million in operating profit in 2006 and positive earnings of 25 cents to 35 cents a share. See why that just might make the stock pop? Of course, this restructuring is, so far, only in the minds of Wall Street investment bankers. See the risk? JDS Uniphase I've saved this one for last because it presents the greatest "timing" challenge. Not on the business side. There, I think the trend has recently become extremely clear: Demand for optical networking gear is finally recovering. The optical-transport equipment market grew 10% sequentially in the June quarter and is up 28% year to year. That's the strongest growth since, you guessed it, 2000. The market for long-haul optical equipment, the market that JDS Uniphase dominates, grew by 13% in the June quarter. The Wall Street consensus is now calling for break-even in the December quarter, and that seems extremely doable. The timing problem is one that JDS Uniphase created with its Sept. 23 announcement that it would seek approval at its December shareholder meeting for a reverse split of its stock. Unlike the usual stock split, which gives an investor more shares -- perhaps two for every one -- at a proportionately lower price, a reverse split results in an investor holding fewer shares at a proportionately higher price. The company has proposed either a 1-to-8 or 1-to-10 reverse split. In theory, companies do reverse splits to raise the visibility of their stock -- more analysts will cover a $20 stock than a $2 stock -- and to increase institutional ownership of the shares -- some institutional money managers are prohibited from owning shares below a certain price. So, in theory, a reverse split would give JDS Uniphase stock more visibility, more ownership and a higher price. But there's a good chance this reverse split won't work like that. First, JDS Uniphase already has tremendous analyst coverage left over from when its shares traded at $147 back in March 2000. Zacks Investment Research lists nine analysts who have made earnings estimates for the September quarter. Second, the reverse split has already put the stock on the institutional radar screen and set it running. The shares were up 14% from Sept. 23 through Sept. 30. Everybody from Jim Cramer on CNBC to Citibank is now recommending the stock. There's a good chance, as Michael Murphy argues in the Sept. 29 issue of his "New World Investor" newsletter, that the stock will run up through the December shareholder meeting and then decline after the reverse split is approved by shareholders -- if it is -- as institutions and professional traders sell. See why the timing might be tricky? You can either buy this one now -- the sooner the better -- and ride the surge with the idea of selling into the news of the actual vote, or wait for any post-split-vote pullback. If you're a trader with the experience to know that you'll be able to pull the trigger on the sell when the time comes, the former is probably the better strategy. If you tend to fall in love with stocks and have difficulty trading them, I'd suggest that you look elsewhere for your profits in any fall technology rally. And never fear. I'll have a column on less risky, non-$5 technology stocks -- you know, the kind with actual earnings -- in a few weeks. Just in time to catch the mid-October window that has historically been the best time to buy for any end of the year rally. Updates Sell Placer Dome Gold I'm going to use the recent rally in gold to the neighborhood of $470 an ounce to sell Placer Dome Gold. I still believe that inflation is a danger going forward, which favors gold and gold stocks. I just don't like this gold stock much right now. The company's costs continue to rise to a direct cost of $381 an ounce in the second quarter and to a cost of $448 an ounce including depreciation. That certainly limits the upside -- especially since costs at the company's big new projects, set to start producing gold in 2006, also seem high. As of Sept. 30, the stock had rallied 20% from its Aug. 26 low. I'm selling these shares with a 14% loss since I added them to Jubak's Picks on September 28, 2004. (Full disclosure: I will sell my personal position in Placer Dome Gold three days after this column is posted.) New developments on past columns In my column, "3 picks for the dog days of summer" on Aug. 26, I argued that growth was picking up in Japan and that the Japanese stock market could well outperform the U.S. stock market over the next year. Slight understatement, at least when it comes to shares of Mitsubishi Tokyo Financial Group Third-quarter 2005 performance for Jubaks Picks Its time for the end-of-quarter and longer-term performance numbers on Jubaks Picks. The portfolio finished the third quarter of 2005 solidly ahead of all the indexes with a return of 14% for the period. For the quarter, the Dow Jones Industrial Average ($INDU) returned 2.9%, the Standard & Poor's 500 ($INX) returned 3.1% and the Nasdaq Composite ($COMPX) returned 4.6%. The 14% return on Jubak's Picks for the September quarter of 2005 compares to a 2% return for the third quarter of 2004. For 2005 to Sept. 30, Jubak's Picks was up 27.4%. That was ahead of the -2%, 1.4% and -1% returns for the Dow, S&P and Nasdaq indexes, respectively. For the trailing 12 months, Jubak's Picks returned 46.3%. That compares to the 3.7%, 8.6% and 10.8% returns for the Dow, S&P and Nasdaq indexes, respectively. These high returns for the quarter -- and the ability of Jubak's Picks to outperform the indexes -- were largely attributable to the portfolio's heavy position in energy. I saw realized gains of 85% when I sold Peabody Energy
Here are longer-term performance numbers for three years, five years (a period that this quarter begins just six months after the peak of the bull market in March 2000 and includes much of the bear-market collapse from that peak) and since the inception of the portfolio in May 1997:
*Close on Sept. 30, 2002, through close on Sept. 30, 2005. **Sept. 30, 2000 through Sept. 30, 2005. ***May 7, 1997, through Sept. 30, 2005. All returns for Jubaks Picks deduct costs of commissions. Returns for Jubak's Picks and the indexes all include dividends. As is my practice, I will update these performance numbers at the end of the next quarter in December 2005. Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Goldcorp, Marathon Oil, Mitsuibishi Tokyo Financial, Newmont Mining, Placer Dome Gold, and Transocean. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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