Hedging Is Your Best Tech Bet
This quarter's results may be better than anticipated.
Broadly speaking, I have been using, and will continue to use, option hedges on many names while also holding trades to a much more compressed timeframe than I normally prefer.
The high degree of volatility in market option premiums has risen and has therefore offered more protection over the last couple quarters - and I expect that trend to hold during this reporting period and probably through the remainder of this year.
And now, let's move on to the reports I'll be watching closely:
ADTRAN, Altera, Intel, Seagate, Verigy
Specifically, I look for Intel to at least post a strong-enough quarter to support the current price, which is approaching deep value levels for this name. I'm probably a buyer on any pullback into the $19s. Longer term, Intel's push into WiMax should drive stronger growth, providing a catalyst to drive up the stock price into mid-late 2009.
I also like Verigy, and feel they may offer some commentary to possibly support the stock in the coming days/weeks.
ASML, Piper Jaffray, Wells Fargo, eBay, Xilinx, Cavium, Polycom
You'll notice I have a couple finance names in this, but you'll have to watch the finance stock report right now. Goldman Sachs (GS) has been positive on ASML (ASML) recently, and Novellus (NVLS) is rising today on a sluggish report last night, as their strong book value is supportive relative to the current depressed price. Broadly speaking, I'm bullish on selective semi-cap chip names at current levels.
I'm neutral on eBay (EBAY) but wouldn't be surprised to see their results still crush brick-and-mortar retail results of late. I'm most interested to hear what Xilinx (XLNX) and Cavium (CAVM) say in the networking and communications channel, which could prove to be a tell for part of Cisco's (CSCO) business. I'd also like to see sell-the-news reaction on Cavium for another entry.
Soapstone, Fairchild, Cypress, SunPower, Evergreen Solar, Google, PMC-Sierra
The middle of that list should carry the most promise - Cypress (CY), SunPower (SPWR) and Evergreen Solar (ESLR). Cypress owns a big slug of SunPower and some other growth initiatives as well, so they could be seeing a double dose of upside emerge in the coming quarters. Evergreen just signed yet another monster contract, for $1.2 billion - they now have a backlog of $3 billion vs. last year's annual revenue of $70 million. Evergreen has recently become one of my larger longs and it'll be hard for me to part with shares ahead of the quarter, but I'll probably force myself to let some go. You know - that discipline thing.
Anyway, I also expect SunPower to produce a solidly to crushingly good quarter.
PMC-Sierra (PMCS) is entering a period where favorable product cycles and mix could offset any near term macro driven weakness.
Google (GOOG) could be a tone-setter. I had very strong bullish conviction on Google well ahead of the last quarter. For this quarter I still think they might perform very well, but there doesn't seem to be as much (or enough?), negativity in Google shares specifically to give me much conviction ahead of their report. I had closed Google, since it recently failed to hold the $557 level. I'm now waiting for another entry point (preferably lower) to buy the shares again. On the other hand, that $585 to $600 level has been very tough to break; a weekly close in that range or through it could be a strong technical long side shot.
Longer term, I haven't changed my bullish upside targets for Google. However, when market conditions change, I re-evaluate. And from a valuation perspective and with so many other tech names in the chips, software as well as small- and mid-cap tech getting crushed, my relative desire to own a large position in Google declines as other deep value and extremely net-cash rich technology shares swell the investment landscape.
Moreover, I haven't seen this many names included in value-based growth screens since after the July reaction low in 2002. The main difference is that many stocks showing those high levels of net cash in 2002 had severely negative growth rates in revenues and were producing negative EPS and cash flow. So you had high cash balances and/or high net cash balances with concomitantly high cash burn rates in many cases.
We aren't seeing that today, or we haven't seen it yet. Many names I'm looking at now are trading at similar levels of price to net cash, and still have positive cash flow.
Maybe this will change and some of these names will experience some negative cash flow, but with 5, 7 or 10 years of accumulated capital, they'll survive and thrive in the next material technology upturn.
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