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5 tech stocks to buy before the rally
Investors have stopped tuning out tech stocks, and the market is reacting to positive news and guidance. With those signs of life, here are 5 techs to buy now.
By Jim Jubak
I see a glimmer of life in technology stocks, just in time for the traditional year-end rally. In this column, I'm going to give you five technology stocks to buy now in anticipation of that rally.
Many technology stocks -- better make that most -- are still busy revisiting their lows for the last 52 weeks. Cisco Systems (CSCO, news, msgs), for example, closed at $16.98 on Oct. 18. The stock's 52-week low was $16.97.
But some technology stocks -- better make that a few -- look like they've put in short-term bottoms and have rocketed above important technical support at their 50-day moving averages. Yahoo! (YHOO, news, msgs), for example, came close to testing its 52-week low of $30.30 when the shares fell to $32.13 on Sept. 23. But that turned out to mark a short-term bottom. Since then, the stock has climbed above its 50-day moving average at $33.59 to close at $35.68 on Oct. 19.
What's the difference between the two groups of technology stocks? The stock market is reacting to earnings news and guidance. Companies that report better-than-expected growth and project even modestly improved fourth-quarter results are seeing their stocks rise. Companies like Intel (INTC, news, msgs), for example, that disappoint the market with their third-quarter results are seeing their stocks sink.
This is exactly what investors want to see at this time of year. If the technology companies that report good news see the price of their shares go up, it's a sign that investors have stopped tuning out the entire sector and are actually ready to respond to good news. If investors see stocks like Yahoo!, EMC Corp. (EMC, news, msgs), Cymer (CYMI, news, msgs) and Motorola (MOT, news, msgs) climbing after reporting better-than-expected third-quarter earnings, they are likely to start buying other stocks in the sector in anticipation of similar gains.
A change of leadership
It may not be obvious from the movement of the big indexes, but we're in the middle of a market rotation, according to Philip Erlanger, editor of Erlanger Squeeze Play. Energy, the sector that has led the market for most of 2005, has dropped from near the top of Erlanger's list to No. 13 out of 18. Utilities, another leading sector for much of 2005, is No. 17, Erlanger says. What's near the top of the list? Health services is No. 1, technology services has moved up to No. 2 and electronic technology is now No. 6.
I think this short-term trend toward technology stocks is likely to get clearer if two events play out as I now expect. First, if Hurricane Wilma pushes northward on its current track, missing the energy platforms of the Gulf Coast, that will take the current Wilma premium out of energy stocks and make it easier for investors to see the rotation out of energy.
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And second, if the Federal Open Market Committee meets on Nov. 1 and doesn't do or say anything as terrible as investors now fear, it would remove a huge worry that has kept lots of money on the sideline. The financial markets are already anticipating another 25-basis-point interest-rate hike. If that's all we get, then the markets will take a deep breath and go back to the task of making money on the long side of the market.
Nothing is ever certain in the stock market. But I'm confident enough to recommend that you take a look at these five technology stocks as ways to participate in the rally. I'm going to add two of them to Jubak's Picks to increase that portfolio's exposure to the sector.
Arris Group (ARRS, news, msgs) reports earnings on Oct. 26, and if the company's guidance is any indicator, investors will see a great quarter. On Oct. 12, the company raised its projections for the third quarter to show revenue growth of at least 54% from the third quarter of 2004 and earnings growth of at least 438%. The company also confirmed its guidance for the fourth quarter and indicated that most of the quarter's revenue is already booked. The driver for these numbers is the explosive demand from the cable companies for the gear that will let them extend Internet telephony (VoIP, or Voice over Internet Protocol) and high-speed data services to new customers. Arris Group's biggest customers include Comcast (CMCSA, news, msgs) and Time Warner (TWX, news, msgs)'s cable division. (I'm going to add these shares to Jubak's Picks. See the "Buy" recommendation at the end of this column for target price and stop loss.)
EMC Corp. only beat Wall Street estimates by a penny when it reported earnings of 13 cents a share on Oct. 19, but that's enough to keep the momentum going. The stock moved above its 50-day moving average on Oct. 17 and has kept going, rather than selling off, after earnings. And that's a very good sign. That might have to do the company raising its fourth-quarter earnings projection to 16 cents a share, a penny above the Wall Street consensus as tallied by Zacks Investment Research. Projected earnings growth for the fourth quarter is now 23%, quite good for a stock that trades at 26 times projected 2005 earnings. The earnings growth isn't just the result of fast growth in network storage as everyone from consumers to CEOs stores more data, graphics, pictures and music on computers. EMC has also been seeing margins climb as it continues to shift its product mix away from hardware and toward more profitable software and as new systems use more application-specific integrated circuits to reduce costs. (This stock is already a Jubak's Picks recommendation.)
Komag (KOMG, news, msgs) keeps getting battered by troubles at other disk-drive companies that aren't in the same business. The latest bit of bad news is Bear Stearns' downgrade of Komag and other disk-drive companies after Seagate Technology (STX, news, msgs) came in light on revenues in the current quarter and guided revenue projections for the next quarter down by 10%. The problem? Seagate reported that the horrendous shortage of disk media -- exactly what Komag makes -- wasn't as bad as last year. That, to the Bear Stearns analyst, added up to a potential glut in 2006. But hold on here. Komag has been turning away business because it didn't have the manufacturing capacity, and that's been a drag on the company's revenue. Now, with modest capacity expansion at the end of 2005 and more in the beginning of 2006, the company believes it can begin to meet demand. That's bad news? The stock's 8% tumble on the downgrade certainly takes most of the risk out of Komag's shares (again), and I'm looking for the company to tell investors a very different story when it reports on Oct. 26. (This stock is already a Jubak's Picks recommendation.)
Marvell Technology Group (MRVL, news, msgs) doesn't report until Nov. 26, but investors got a solid preview of the company's results when competitor Broadcom (BRCM, news, msgs) announced a 3-cents-a-share earnings surprise on Oct. 20. I expect that Marvell Technology Group will do even better since 1) at a projected 53% growth rate the company is growing faster than Broadcom; and 2) the company is grabbing market share in some of the fastest-growing technology markets. In wireless local area networks, Marvell Technology has recorded design wins for the Sony PlayStation Personal and PlayStation 3 console and for Microsoft's Xbox 360. The stock never gets particularly cheap -- it now trades at 34 times projected 2005 earnings growth -- but the current retreat to the 50-day moving average is about as big a pullback as I've seen since May. (I'm going to add these shares to Jubak's Picks. See the "Buy" recommendation at the end of this column for target price and stop loss.)
And now, for something truly speculative.
The end-of-the-year technology rally is never about fundamentals. It's about hope. Momentum. And money flow. Investors who have tried to make a buck on this seasonal rally in past years know that in most years, the stocks that go up the most are often those with the lowest prices and the best stories rather than the soundest business prospects. Of course, in some years some stocks like this go from cheaper to cheapest.
But speculation can have a place in a portfolio if, No. 1, you know you're speculating and put up only as much money as you can afford to lose without slitting a wrist, and, No. 2, you do it in a market with dynamics slanted in favor of your speculation. So for you end-of-the-year speculators (you know who you are), I'm going to recommend shares of Anadigics (ANAD, news, msgs).
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