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Gadget Stocks Get Their Mo Back

Richard Suttmeier

04/07/06 - 01:30 PM EDT

On Feb. 24, the gadget stocks I follow showed declining or oversold momentum. Now they all have rising momentum. Following the weekly chart profiles is taking precedence over stock valuations at this time. This is a characteristic of a momentum market. It's fair to say the gadget stocks are in one now.

Apple(AAPL Quote - Cramer on AAPL - Stock Picks) shares are regaining momentum as new iMacs and notebook PCs with chips from Intel(INTC Quote - Cramer on INTC - Stock Picks) give access to Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) Windows software. SanDisk(SNDK Quote - Cramer on SNDK - Stock Picks) is heading back up toward the high end of its trading range as demand for flash memory proves to be no flash in the pan. Sirius Satellite(SIRI Quote - Cramer on SIRI - Stock Picks) became 20% undervalued and bottomed as subscriptions passed the 4 million mark, helped by Howard Stern fans.

Despite the dominance of the momentum characteristics, it's still worth reviewing the valuation picture. The technology sector began the year 10.5% undervalued and is now just 2.1% overvalued, while computer manufacturers are now 2.6% overvalued and electronics 9.4% overvalued. After its first-quarter hiccup, technology is swinging back to being a momentum trade, but be aware that the monthly chart for the tech-heavy Nasdaq has become overbought. The Nasdaq chart shows monthly and quarterly supports at 2288 and 2275, respectively, with monthly resistance at 2382.

Technology has presented a difficult environment for a buy-and-hold portfolio strategy, but there have been trading opportunities for investors with the discipline to enter good-till-canceled (GTC) limit orders to buy weakness to a value level (a price at which my models project that buyers will emerge) or key longer-term moving average. Two guidelines I have been suggesting worked for Apple and Sirius in March. Investors could have bought Apple at its 200-day simple moving average at $58.19 on March 29, and Sirius at $4.40 on March 14, when shares became 20% undervalued. It takes discipline to enter these strategies, but the opportunities are there for the taking.

I last profiled the gadget stocks as a group when they were in a price-correction mode, on Feb. 24. I updated some on March 9, and I posted to Columnist Conversation about Sirius when it reached that dramatic valuation level. Today's table includes new monthly and quarterly levels, which are based on the March 31 closes.

Good to Mo
Gadget stocks see rising momentum
Company Name (Symbol) 4/6/2006 Price Rating % UV/OV Fair Value MOM 5-Week MMA Value Levels Pivots Risky Levels
Apple (AAPL) $71.24 HOLD 3.80% $68.66 RM $65.88 51.86 A 66.66 Q 74.76 Q/84.78 M
Dell (DELL) $29.67 HOLD -16.10% $35.37 RM $29.76 25.06 M 36.40 Q/36.90 Q
Hewlett-Packard (HPQ) $34.10 HOLD 12.10% $30.42 RM $32.66 26.97 A 33.59 A/34.27 M 35.36 M
Motorola (MOT) $23.77 HOLD 22.30% $19.44 RM $22.20 20.96 A 21.78 Q/23.10 A 24.19 Q/26.59 M
SanDisk (SNDK) $63.32 HOLD 25.60% $50.39 RM $58.08 51.30 S/50.18 Q 72.31 M
Sirius Satellite (SIRI) $5.41 SELL 6.00% $5.10 RM $5.25 none 6.78 M/7.45 Q
Risky level: a price at which investors are likely to reduce holdings according to my models. Value level: a price at which my models project that buyers will emerge. M - Monthly, Q - Quarterly, S - Semiannual, A- Annual

Apple has put on some moves that make paring it seem right now. In my March 9 update I suggested that investors buy weakness to the stock's 200-day simple moving average (SMA), which was $58.19 on March 29, when the low was $57.67. From the January parabolic high at $86.40 to the low, Apple lost 33.2%. Apple is now above my quarterly pivot at $66.66. Investors should reduce holdings on strength to my quarterly risky level (a price at which investors are likely to reduce holdings, according to my models) at $74.76, which would lock in a gain of 28.5% from the test of the 200-day SMA. Apple reports quarterly results on April 19, and EPS is expected to be 44 cents.

Dell's(DELL Quote - Cramer on DELL - Stock Picks) fair value has declined to $35.37 from Feb. 24's $39.83, a significant reduction, and this explains why share price does not rise off the mat. With the hold rating ValuEngine currently assigns it, there's not much to do unless there's weakness to my monthly value levels of $25.06 or strength to my quarterly risky levels of $36.40 and $36.90.

Hewlett-Packard(HPQ Quote - Cramer on HPQ - Stock Picks) is above my annual pivot at $33.59. Investors should reduce positions on strength to this month's risky level of $35.36. I would not add to positions unless there was weakness to my annual value level of $26.97.

Motorola's(MOT Quote - Cramer on MOT - Stock Picks) low of $20.22, made March 13, was below my annual value level for the stock of $20.96. The rebound from that swoon has the stock back above my annual pivot at $23.10. With the stock more than 20% overvalued, investors should reduce positions on strength to this quarter's risky level at $24.19. I would not add to this position except on weakness to my annual value level at $20.96. Motorola reports quarterly results on April 18 and EPS of 29 cents is expected.

On March 9, I suggested that investors add to SanDisk positions on weakness to my semiannual value level of $51.30, but this opportunity was missed because the low on March 10 was $52.15. Investors should be patient; SanDisk is now 25.6% overvalued. Consider reducing this position on strength to my monthly risky level of $72.31.

In my March 14 post about Sirius, I pointed out that the stock was trading at a new 52-week low of $4.36, which put the stock 20% below its fair value that day of $5.50. Typically, a highly speculative stock such as Sirius achieves a tradeable bounce when it becomes 20% undervalued, and this has been the case for Sirius. Back on Dec. 8, with shares trading above $7.40, I made a very unpopular call to sell Sirius. The move from $7.40 to $4.40 represented a decline of 40.5%. Now, with fair value down to $5.10, the stock is 6.0% overvalued and still has a sell rating according to ValuEngine. Investors should be patient and not add to positions unless the stock becomes 20% undervalued again. Because the stock has a positive weekly chart profile, there is no reason to sell now. But investors should reduce holdings on strength to my monthly risky level at $6.78.

Guideline Summary

Fundamentals: I receive new data every night for my model from ValuEngine, which uses 20 data points from Thomson/First Call and Capital IQ, including 12-month trailing EPS, 12-month forward EPS from Wall Street analysts' projections and the 30-year bond yield. These data points update stocks' fair values.

Technicals: A stock with rising or overbought momentum and above its five-week MMA is likely to move higher.

Buy and sell levels: My model gives levels at which to consider buying on weakness and selling on strength. I use the following abbreviations to denote time horizons: M for monthly; Q for quarterly; S for semiannual; and A for annual.

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