ChangeWave Investing Weekly Update
May 05, 2008
STOCKS MENTIONED IN THIS WEEK'S UPDATE INCLUDE: Apple (AAPL), Cisco Systems (CSCO), Echelon Corp. (ELON), Geron Corp. (GERN), Isis Pharmaceuticals (ISIS), Municipal Mortgage & Equity (MMAB), Research In Motion (RIMM), Sangamo Biosciences (SGMO), Synchronoss Technologies (SNCR), VMware (VMW) and Zoltek Companies (ZOLT), among others.
CHANGEWAVE BUY LISTS:
To view our current ChangeWave Portfolio buy lists, click here.
ACTIONS
ALTERNATIVE ENERGY WAVE
Zoltek Companies (ZOLT) -- Move to "Hold"
CLEAN TECH WAVE
Echelon Corp. (ELON) -- Lower Buy Under to $15
VIRTUALIZATION WAVE
Synchronoss Technologies (SNCR) -- Buy Under $25
VMware (VMW) -- Lower Target Price to $115
THE IDES OF MARCH PAY OFF
Dear WaveRiders,
The market has had a great time the last 45 days or so as the Dow Jones Industrial Average (DJI) rushed up through the 13,000 mark before running out of gas. Anytime we get a fast-and-furious 1,000 point move like this one, you shouldn't be surprised by any 25% to 50% retrenchment of that move that follows.
Yes, going back about 45 days would take us to the "ides of March," but the only investors who are now dreading this period were probably not invested in some of our favorite companies like Apple (AAPL), Research In Motion (RIMM), SanDisk (SNDK), Brigham Exploration (BEXP), Energy Conversion Devices (ENER) and VMware (VMW). One glance at the charts of all these names shows a similar pattern that includes a steep ascent in value.
I suspect this steady climb will be tempered by the latest Bureau of Labor Statistics (BLS) numbers that arrived on Friday, as the better-than-expected results are viewed in the harsh light of day.
Many others have covered how questionable our government figures have been lately and this is another time when the numbers must be taken with an extremely large grain of salt. Especially when you consider that it takes the feds several attempts to come up with the correct number.
For example, the BLS's numbers have included doozies such as 45,000 new construction jobs in April 2008, when the actual results showed a decline of 61,000. (Maybe they conducted the survey in Shanghai.) Or how about 8,000 new jobs in finance when the real figures show 22,000 finance jobs vanished.
Even the BLS hedges its bets about how accurate its figures are, so how much confidence can you really have in their reports?
This is one of many cases where it's better to pause before getting too excited about the latest headlines. But as you may have guessed, we have a distinct advantage here at ChangeWave.
While the government makes scientific wild-a** guesses, we can take a look at our real-time data from our ChangeWave Alliance research panel to give us a better picture of the economy. This is one of the reasons we recommended many of the stocks in today's hottest waves and why we'll be early for the next waves on the horizon.
Two of the biggest moves have been in Apple and Research In Motion -- read on to learn more.
THE ALLIANCE ADVANTAGE
The ChangeWave Alliance is comprised of more than 15,000 individuals who spend their everyday lives at the front lines of nearly every global industry that matters to the economic growth of the United States and the world.
By literally being wired into this remarkable network of professionals, we enjoy a host of strategic advantages unrivalled by even the biggest Wall Street firms. Above all, the market, industry and company intelligence gathered, compiled and analyzed each week provides us with real-time insights into important consumer and corporate spending trends.
Now, over the years we've learned that the Alliance research is a more powerful tool for some areas more than others. There are numerous reasons for this, but as we learn the lessons, the Alliance team headed by Dr. Paul Carton has fine-tuned their approach to maximize the value of this network for all WaveRiders.
One of the best examples of the Alliance's ability to deliver "ahead of the curve" research is in the PC, smartphone and consumer electronic markets.
And, as we've all seen, this hase given us a true edge as we track the ups and downs of Apple (AAPL) and Research In Motion (RIMM).
The Dominators: Apple and RIM
As every ChangeWave Investing subscriber knows, we've been consistently prescient in our reports on these two companies and the key consumer and corporate markets for their products.
Even after AAPL and RIMM suffered big pullbacks from their respective highs of $200 and $133 in late 2007, our research continued to reinforce the powerful momentum in both companies and compelled us to reiterate our strong "buys" in these two market dominators -- despite the economic slowdown we warned you about at the start of this year.
Today, Apple has bounced back 52% from its $120 low in early March, and RIM is testing its all-time highs at $133. Given the impressive run-ups, it wouldn't surprise us to see some profit-taking in these stocks in the next few weeks. So, while the parade is still marching on, it's a good idea to sell a small portion (i.e., 20%) and shift the proceeds into another area of our portfolio.
But understand that we are in no way saying that Apple and RIM's momentum is kaput. The green light continues to flash in our Alliance research and the fundamentals point to further growth thanks to new products and cycles.
For Apple, the 3G iPhone remains on track for a global June launch, with subsequent carrier announcements, and new pricing and features.
Reports suggest that AT&T (T) (which has an exclusive five-year deal to sell the iPhone in the United States) is prepared to subsidize the device by as much as $200, slicing the purchase price as low as $199 for customers who sign a two-year service contract.
Yes, it's looking increasingly likely that a $199 3G iPhone will be a reality -- not to mention a great value proposition and big driver for Apple. Under such an arrangement, an all-you-can-eat voice and data plan for, say, $99 will be a juicy offer that will undoubtedly cause another surge in Apple sales.
Apple is preparing for the next battle with RIM, which has its own 3G phone coming out in August. The competition is going to be rough, so AAPL is clearly prepared to lower the price point to be competitive not only in the United States but also in Europe and beyond.
But as we said last week in discussing the "smartphone war," both Apple and RIM dominate the U.S. smartphone industry and are in the process of overwhelming the competition.
Each has a super-loyal cadre of users who fervently support their phone brand -- and each has extraordinary room to grow.
Today there are more than 1 billion cell phones in the world, and our ChangeWave surveys have picked up a seismic shift occurring among U.S. consumers toward the high-end smartphone market. In the simplest terms, that's where the momentum lies.
And as consumers gravitate toward quality multidimensional cell phones -- i.e., smartphones -- our research shows both Apple and Research In Motion are the big winners.
We also note that the rollout of the 3G iPhone will also provide a boost to the shares of Synchronoss Technologies (SNCR), which jumped last year when the iPhone was first introduced. The company's automated ConvergenceNow platform improves the quality and reduces the cost of initiation and upgrades of cell phone services, such as those for AT&T and the iPhone.
Based on these developments, we're removing our "Hold" on SNCR and replacing it with a Buy Under price of $25. The new 3G iPhone will reignite interest in Synchronoss and get this stock moving again.
SOFTWARE'S SOFTENING TREND
Between the Alliance's quarterly IT spending surveys and quarterly corporate software purchasing surveys, the ChangeWave team enjoys an edge in the software space that few -- if any -- Wall Street outfits can compete with.
The Alliance's latest look at the software industry shows a further retrenchment is occurring in corporate software spending. There is little evidence of growth so far in the second quarter, as the findings point to a continuing recession in business spending.
Still, one clear bright spot in the current malaise is the uptick in corporate spending for virtualization and security software. That's good news for VMware (VMW), which is the dominate player in virtualization -- the best route for companies seeking to reduce costs and boost energy efficiencies in the IT area.
Beginning with the overall picture, 25% of respondents said their companies will spend less on software during the next 90 days -- three points worse than our January 2008 survey.
Only 12% said their company will spend more -- down four points from the previous survey.
So, what's causing companies to tighten the purse strings? The general slowdown in business conditions and capital budgets was cited as one of the prime drivers of purchasing decisions.
When asked about recent adjustments to their company's overall capital budgets for the second quarter of 2008, the picture didn't get any better.
In a clear signal that the spending downturn isn't over, 26% said their second-quarter capital budgets have been adjusted lower in the past 90 days -- four points worse than three months ago and more than triple the percentage who said their capital budgets have increased (8%).
VMWARE BUCKS THE TREND
We also asked about specific software categories, and it's notable that 40% of respondents said their company has no plans to purchase software in the next 90 days, a two-point uptick from previously.
Software categories that are being particularly hard hit include enterprise resource planning, document and enterprise content management, and customer relationship management software.
On a brighter note, the survey results show virtualization software and security software experiencing increased spending going forward.
Virtualization is clearly among the highest priorities for corporations, which are aggressively seeking ways to maximize IT capital during these tough economic times.
Virtualization is a cost-effective solution for nearly every kind of firm that utilizes IT systems on a reasonably significant scale. With virtualization software, companies can make better use of servers and data centers, where a big portion of equipment is underutilized.
Importantly, implementing virtualization software translates into energy savings, particularly for companies with massive data centers, which are notorious for wasting energy. Actually, there is now a movement under way that is being characterized as the "greening of data centers."
VMware (VMW) shows the most momentum in terms of market share gains during the previous 90 days. And this was reflected in the company's recent financial results, which helped propel VMW to $70 last week, and up 63% from the end of March.
On April 23, VMware reported Q1 EPS of 22 cents -- in-line with the Street's consensus estimate -- and revenue growth of nearly 70% to $438 million versus the consensus of $422 million.
VMware's software license revenue grew 73% to $294 million and service revenue, including support, subscription and professional services, increased 62% to $144 million.
The company reaffirmed its guidance for fiscal year 2008, projecting year-over-year revenue growth of 50%, or $2 billion, and in-line with the consensus estimates of the Street.
VMware's shares are now trading well above our Buy Under of $50, but we're going to hold the line there. Despite the company's healthy fundamentals and solid outlook, the competitive environment for VMW will become increasingly challenging during the coming quarters.
We recommend holding your VMW position; however, given the overall caution in software spending, we're reducing our Target Price to $115 -- still a nearly 70% gain from here.
CISCO HEADS-UP
Cisco Systems (CSCO) will report its fiscal Q3 results after the close tomorrow (May 6), and judging by the vibe in the market and among investors, it's pretty clear that no one is quite certain how CEO John Chambers will characterize the business environment.
As we remember all too well, Cisco held a quarterly conference call in November in which the cautious CEO provided a less-than-stellar take on the demand outlook from the perspective of Cisco's customers, particularly of those in the financials vertical. The news helped to trigger a three-day market sell-off.
We're not expecting a similar event this week, but there is still good reason to be cautious given the most-recent Alliance industry and macroeconomic research. This data continue to show that, although the declining trends have steadied, there are few signs of any immediate turnaround.
The Street expects Cisco to post revenue of $9.75 billion and EPS of 36 cents, which reflect the company's own guidance. One quarter ago, Chambers warned that Q3 revenue growth would likely be only 10%, rather than the 15% the Street had been expecting.
In any case, judging by Chambers' previous performances and the current stinginess in capital spending on IT infrastructure and telecommunications hardware, it wouldn't surprise us if he gives a cautious outlook.
While Cisco is the dominant player in data networking and related technologies, and it continues to increase market share in several segments, the company will only return to its 16%-plus top-line growth rate when tech spending rejuvenates.
The best approach is to ride through any pullback -- if it happens -- and use the opportunity to buy additional CSCO shares or establish a new position. Once the economy turns, Cisco will be among the very first firms to enjoy the benefits.
Our Buy Under price of $27 remains, and $50 is our Target price for the next 12 to 15 months.
A LOWER ECHELON
Echelon Corp. (ELON) is experiencing its share of challenges lately.
The company's shares are down 67% from their 52-week high.
Last week ELON announced that it will restate financial statements to correct an accounting error, as well as make adjustments to its balance sheet for several years. While not overly serious, it's never good to see these sorts of screw-ups.
And today we learned that the company lost its president and COO to a cerebral hemorrhage.
Tough times for a company that should be basking in the energy-savings boom for industry, which we recently saw highlighted in the Alliance's corporate energy usage report.
Though management claims not to have seen any impact from the falling U.S. dollar or tightening credit markets on customers' buying plans, they said that both of these phenomena are working together to make this a challenging year.
Still, Echelon is in the right place at the right time with products to help utilities, cities, businesses and consumers monitor and manage their energy consumption.
Its LonWorks platform is the control technology in hundreds of thousands of commercial buildings worldwide. Most save at least 20% of their energy use as a result. Echelon's technology also controls China's high-speed trains and New York City's public schools, and even keeps babies safe in more than 900 maternity wards.
In addition, its technology will make Beijing's Bird's Nest Stadium at the 2008 Olympics more energy-efficient -- a nice PR opportunity this summer.
Echelon is down, but certainly not out. As the economy picks up and the company heals its wounds, it is well-positioned to rebound and catch the momentum we're seeing in the global Clean Tech Wave.
We are tightening our Buy Under to $15 but suggest that subscribers consider buying ELON while it's around $11.
MUNIMAE IN SURVIVAL MODE
The final shoe to drop in the Municipal Mortgage & Equity (MMAB) disaster is the temporary suspension of its quarterly dividend, which the company announced today.
"The suspension of the company's dividend distribution is being done to conserve capital to protect the long-term prospects of the business, given the current dislocation of the credit and debt capital markets and its impact on MuniMae's business," company officials said.
The company said it plans to review the dividend payout on a quarterly basis.
It's clear that MuniMae is in survival mode, and building capital is the way a company survives.
The suspended dividend hurts investors in the very short-term, but in the long run, it just may be the survival mechanism that allows the company to thrive.
We are keeping the stock on "Hold" while we wait for it to get relisted on the NYSE, which should happen by the end of the summer or early fall. At this time we expect to see a nice rebound in the share price. We'll keep you posted.
ZOLTEK IS JOLTED
Zoltek's (ZOLT) shares fell 9% today after the company said its previously issued financial statements for fiscal 2007 (Sept. 30) and the quarter ended Dec. 31, 2007, should no longer be relied upon. Earlier today the stock was down as much as 27%.
Normally this would be enough to send us packing from the stock, but when you look at the apparent details, it really doesn't appear to be all that ugly -- at least on the face of things.
Zoltek recently became aware of errors in those financial statements resulting from a payment aggregating $175,000 by a subsidiary of the company in September 2007 that was not properly authorized or reported in its financial records. The company also identified a similar payment of $75,000 in January 2008.
Although ZOLT claims it is not aware of any other unauthorized transactions, the Audit Committee of its Board of Directors has initiated an investigation to determine whether any such transactions have occurred.
The company also announced that its chairman and CEO will take over the duties of CFO after the now-former CFO resigned. A search is on for a new CFO to come on board as soon as possible.
Zoltek has always been a long-term investment for us and a great play on advanced materials for the next generation of energy and a variety of industrial applications. Its carbon-fiber technology has enormous potential, particularly in the automotive and aerospace industries, where high-performance, lightweight materials are highly valued.
We don't think the current accounting problems will have a lasting impact on the future performance of Zoltek. Then again, there is clearly the possibility that more dirt will be uncovered before this episode is finished.
While it's tempting to jump in while the stock is still down, we think the best approach is to sit tight and wait for the final assessment on the accounting situation. Should another shoe drop, we might get the chance to buy ZOLT below $20.
For those holding the stock, sit tight and ride through this temporary storm. Once the coast is clear, ZOLT will be a great buy -- for now we're moving it to "Hold."
ASK TOBY: BIOTECH BASKET UPDATE
Toby covers the trio of biotechs in the ChangeWave Investing portfolio: Geron Corp. (GERN), Isis Pharmaceuticals (ISIS) and Sangamo Biosciences (SGMO).
Watch video. Listen to audio.
Remember, Toby loves getting your questions and answers as many as he can, so please keep sending them to asktoby@changewave.com.
FORT WORTH MONEYFAIR
If you're a ChangeWave Investing subscriber in the North Texas area, you won't want to miss BizRadio's Fort Worth MoneyFair 2008 on May 8, from 8:30 a.m. to 5 p.m. Central, at the Will Rogers Memorial Center Round Up Inn.
This fast-paced, information-packed economic forum will feature some of the nation's top financial experts, including Toby. He'll be talking about the hottest new technologies that will change your life -- and could skyrocket your portfolio!
Register now at www.bizradio.com/fwmoneyfair2008 or call (800) 652-3263 to get your free tickets.
Seats are limited, so sign up today!
GET YOUR FREE TICKETS TO THE VEGAS MONEY SHOW AND LOS ANGELES TRADERS EXPO
Would you like to be a better investor and trader? Increase your profits? Become financially independent?
Then you need to attend the Las Vegas Money Show, May 12-15, at the Mandalay Bay Resort. Get your free tickets today.
And you won't want to miss the Los Angeles Traders Expo, June 18-21, at the Ontario Convention Center. Learn how to become a successful trader and keep your wealth growing in this turbulent market.
Sign up for your free tickets now.
'INVESTING FOR INCOME GROWTH' WITH TOBY SMITH
Toby will be speaking at the American Association of Individual Investors (AAII) Connecticut Chapter Meeting on Thursday, June 19. Here are the details you need to know:
Location: The Waters Edge at Giovanni's II, 2748 Post Road (US-1), Darien, Conn.
Time: 6 p.m. - 9:15 p.m.
6 p.m. -- Registration
7 p.m. -- Dinner
8 p.m. -- "Investing for Income Growth"
Cost: $40 in advance/$45 at the door (program and dinner); $25 per person (program only) Please mail reservation and check to:
CT AAII,
c/o Peter De Nicola
P.O. Box 83
Thornwood, NY 10594-0083.
For more information, call 203-245-1211 or e-mail AAIIConnecticut@aol.com.
JOIN US ON OUR NEXT WINE, DINE AND STOCKS ADVENTURE
If you're a lover of food, wine and travel, and are ready to become an expert on the fabulous Spanish wines and tapas, you simply have to come to the fifth-annual Wine, Dine and Stocks Seminar in gorgeous Bilbao, Spain, Oct. 19-24.
Indulge all of your senses as we take you on a crash course in the leading-edge culinary and viticulture arts of the truly magical La Rioja region of Spain.
Only a few slots remain, so you must act quickly.
I urge you to make an investment in your "emotional wealth" by joining us on this trip.
Go to www.changewaveseminars.com to check out the fun-filled agenda and to reserve one of the remaining spots.
Ole!
Hit 'em straight,
Toby Smith
Executive Editor
Joshua Levine
Editor
ChangeWave Investing