Jubak's Journal
Recent articles:
• Why the greenback is back, 11/15/2005
• 5 value stocks for a momentum market, 11/11/2005
• 5 energy stocks for the cold of winter, 11/9/2005
More...
| | Jubak's Journal
5 tech stocks to ride the rally
The end-of-year technology-stock run-up is here, but it's not lifting all stocks in the sector. The key to getting a piece of the gains? Follow the hot money. And be ready to sell.
By Jim Jubak
A funny thing happened on the way to the traditional end-of-the-year technology rally: Some of the biggest names in the sector decided not to join in.
Since the Nasdaq Composite ($COMPX) started to rally back on Oct. 12, the technology-laden index is up 13%.
But such sector bellwethers as Dell (DELL, news, msgs) and Cisco Systems (CSCO, news, msgs) have gone nowhere, dropping 9% and 1%, respectively, during the rally.
The leadership, instead, has come from small capitalization technology stocks such as Trident Microsystems (TRID, news, msgs), market cap $890 million, up 18% during the rally.
That out-performance by smaller technology stocks in this rally doesn't have much to do with fundamentals, although it certainly doesn't hurt that Trident Microsystems smashed through Wall Street earnings estimates of 19 cents a share by more than 30%. Or that the company upped its guidance for the next quarter. And split the stock two-for-one.
That's sure better than issuing an earnings warning for the third quarter, as Dell did, and then warning again for the next quarter, while admitting that the slump in growth leaves the company stumped.
Big mo
But when it comes to end-of-the-year rallies -- especially end-of-the-year rallies in a stock market dominated by short-term hedge fund money -- it's momentum that counts. Last year, a year-end rally bailed out many mutual-fund and hedge-fund managers who had been trailing their benchmarks going into the fourth quarter. And the hope in hedgeville, where the size of the manager's fee depends on beating the index, is that a strong fourth-quarter rally will do the trick again.
Related news and commentary on MSN Money
And if you're looking for a fourth-quarter rally to save your year, you go with the hot stocks. No time to wait for a company to turn around or for hidden value to come to the surface. It's the time of year to put money into stocks that have been going up in the belief that they'll keep going up.
For a while this kind of momentum-following produces its own success. Money flows into a stock that's been moving up, because it has been moving up, and that in turn drives the stock up further. And, of course, it's a whole lot easier for money flows to push up a stock like Trident Microsystems -- with its 26 million shares outstanding, total market value $890 million -- than it is to move a stock like Dell, with its 2.4 billion shares outstanding and its $71 billion market capitalization.
Historical data shows that stocks could rally for a while here. Stocks have gone higher on average during the period from late October through late January. (No one is quite sure why this trend exists. The best explanations, in my opinion, point to tax-loss selling in October and November and cash flows from investors and managers who need to put money to work before the calendar year ends.)
So if you want to play the end-of-the-year rally, now's the time. And here are three stocks with the right stuff for that year-end trip to the moon that I recommended in my weekly appearance on Wednesday, Nov. 16 on CNBC's Morning Call.
Keep your finger on the trigger
One BIG caveat before I get to these picks. Remember how the energy sector turned from red hot to ice cold in a matter of days at the end of September? I'd expect a repeat of that turn-on-a-dime performance when this technology rally ends. The problem with momentum markets driven by quarter-end performance anxiety is that once the quarter's end is in sight, the smart thing to do is to sell. If you want to play this rally with these small-cap momentum stocks, you have to be prepared to do the same.
Trident Microsystems (TRID, news, msgs): A good story is essential for a momentum stock and, boy, does Trident Microsystems have a great story. On Oct. 26, the company announced earnings for the first quarter of fiscal 2006 of 25 cents a share, 6 cents a share above Wall Street estimates, and said that revenue had grown 100%. The company makes video-processing chips for the flat-screen digital LCD TV market (85% of Trident's revenue). Prices for large flat-screen TVs continue to fall, which is just fine with Trident, because lower prices mean more TV units sold. The company's revenues come from China (20%), Japan (39%) and Korea (32%). The stock trades at 31 times projected earnings for the fiscal year that ends in July 2006. Wall Street analysts project that the company will grow earnings by 36% in fiscal 2007. (Calculating a growth rate for fiscal 2006 isn't possible since the company showed a loss for fiscal 2005.) Our StockScouter rates these shares a 7 out of a possible 10.
|
