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Tech stocks will rock into year-end
By Cody Willard 10/7/2004
Since I began scaling into long-dated calls in a plethora of broader tech names in early August, I've been repeating a mantra that goes something like this: With so many of these tech stocks trading at or below cash and/or trading at single-digit price-to-earning ratios, if the economy stays steady and these companies come anywhere close to their second-half estimates, these stocks are going to rock into year-end.
I was clear that I wanted to build those positions over time, and I certainly never drew a line in the sand trying to call a bottom. But that analysis, while certainly still subject to change between now and year-end, is starting to be affirmed by the action in the market.
It probably started with Texas Instruments' (TXN, news, msgs) midquarter update, when the company guided slightly lower than the consensus. Rather than crashing the next day, it took off and has rallied for weeks since. National Semiconductor (NSM, news, msgs), KLA-Tencor (KLAC, news, msgs) and others caught their groove too, and the semis and other stocks quietly rallied throughout September.
These companies have all basically said that business is OK, not horrid, and investors began to wonder if maybe those second-half estimates are achievable after all. And so the stocks caught bids and started moving higher.
Several stocks show life
Fast forward to this week, and we're beginning to see what can happen when these tech companies, whose stocks had been left for dead, say that business isn't just fine, but maybe even improving. Software vendor Siebel Systems (SEBL, news, msgs), which had been heading toward trading near cash, popped 25% Monday when it said things were better than it and the Street had expected; Hutchinson Technology (HTCH, news, msgs) popped a similar amount Monday when the supplier of disk-drive assemblies said it had seen demand return; tiny little, and overly hated/shorted Simple Tech (STEC, news, msgs) said it had seen business trends uptick, and its shares gapped up from below $4 to above $5.
Tuesday's indicator was Advanced Micro Devices (AMD, news, msgs), which essentially said in a press release out curiously late Monday night that it would miss revenue estimates by more than 10% and earnings by a lesser amount because of higher margins and strong sales of processors. The stock opened down 5% or so and has rallied all the way back to flat as investors realize that if this company can come anywhere close to those second-half estimates -- well, it just might be a decent buy down here. (AMD was recently down 4 cents, or 0.2%, to $13.66 after trading as low as $13.09 intraday.)
I'll keep the caveat the same: If the economy falters -- and oil's continued rise sure doesn't help things in that regard -- all bets are off.
But if things are OK and/or even pretty darn good into year-end, there are going to be a whole lot more Texas/National Semi/Siebel-type moves to be had. I'll probably wait for more potential weakness before adding to any of those types of positions myself as I've got a slew of calls already kicking in.
But I figure there's still a lot of upside from here, if business trends just stay OK.
At time of publication, the firm in which Willard is a partner was long Texas Instruments calls and AMD calls, although positions can change at any time and without notice. Click here to read our conflicts and disclosure policy.
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