ChangeWave Investing Weekly Update
May 12, 2008
STOCKS MENTIONED IN THIS WEEK'S UPDATE INCLUDE: Apple (AAPL), Cisco Systems (CSCO), Echelon Corp. (ELON), Energy Conversion Devices (ENER), LDK Solar (LDK), Orion Energy Systems (OESX), Research In Motion (RIMM), SunPower Corp. (SPWR), Suntech Power Holdings (STP), VMware (VMW) and Yingli Green Energy (YGE), among others.
CHANGEWAVE BUY LISTS:
To view our current ChangeWave Portfolio buy lists, click here.
ACTIONS
ALTERNATIVE ENERGY WAVE
Energy Conversion Devices (ENER) -- Sell 50% of the position
LDK Solar (LDK) -- Lower Target Price to $75
RULING THE WAVES
Dear WaveRiders,
The U.S. stock market has climbed higher since mid-March, but it's not clear whether the bottom is finally behind us. Mixed economic and market signals concerning the housing and credit crises, and the menace of commodity-driven inflation, still have investors confused about the direction of the major indices.
Despite the crosscurrents, several of our big-cap growth stocks continue to provide stunning confirmation for the potency and accuracy of our ChangeWave Alliance research.
Marquee companies Apple (AAPL) and Research In Motion (RIMM) remain the stars of the show.
Once again, Apple is currently surging toward the $200 mark, while RIMM busted out to all-time highs today. In fact, RIMM shot up more than 7% as the company unveiled its BlackBerry Bold smartphone, which includes a host of new features to make it more competitive with Apple's iPhone.
Interestingly, AAPL's 55% gain since March 10 accounts for 32% of the Nasdaq 100's bounce -- all by itself. Along with RIMM and Google (GOOG), these three stocks together account for nearly 67% of the index's 17% rally.
Another dominator, VMware (VMW), has rallied 50% since the end of March. As you'll see below when we highlight the latest Alliance findings, virtualization is alive and well in the corporate sector and VMware remains the best-positioned player in the field.
And this year has certainly lived up to the billing of the Alliance report "2008: The Year of Solar." Rebounding from their March lows, LDK Solar (LDK) is up 80%, SunPower Corp. (SPWR) is up 50% and Suntech Power Holdings (STP) is up 40%.
Last week, thin-film solar-cell producer Energy Conversion Devices (ENER) soared nearly 50% on surprisingly strong quarterly results. (See below for more details on ENER's performance.)
Still, for the most part, recent data from the ChangeWave Alliance show that consumers continue to exercise considerable spending restraint. This is best reflected in the standout ratings for Costco (COST) and Wal-Mart (WMT), which are towers of power in an otherwise hurting retail sector.
On this point, one of the lessons we've learned is that the Alliance provides equally valuable intelligence outside of the technology realm. As a result, we intend to be more proactive in turning this research into winning stock picks for WaveRiders in the coming months.
Back to the corporate side, in the next few weeks we'll be reviewing loads of valuable insights about macroeconomic trends as the Alliance's two major quarterly surveys -- IT spending and corporate sales -- are sent out to thousands of industry professionals.
What we learn will clearly impact our strategy and may very well tell us what's in store for the second half of 2008. Additionally, it will help us to identify the best new stocks for our portfolio and to determine which ones to sell.
Rally Reality
One good way to tell if the market rally has traction is by looking at the most economically sensitive sectors -- technology and consumer discretionary stocks. Naturally, if the economy is improving, then these companies should recover from the bottom of a downturn with vigor.
On average, since 1974, the tech sector has gained 27.7% in the three months after a market bottom, and consumer discretionary stocks have risen 23.3% in the same period, according to Ned Davis Research.
Since March, technology stocks -- led by AAPL and RIMM -- have been among the best performers, but, as we've clearly seen in Alliance surveys, consumer discretionary has trailed the overall S&P 500 (SPX).
One of our favorite indicators for determining a bona fide market recovery is the performance of smaller stocks. We are also the editors of ChangeWave MicroCap Investor, so we spend lots of time living with the smallest stocks, and we can verify that it hasn't been all fun and games in microcap land.
In broader terms, small stocks are generally those with market capitalizations below $2 billion, and these stocks generally perform better than large-cap stocks in the first few months of market recoveries.
Since 1979, for example, the median gain for small stocks in the three months after market bottoms has been 19.6%, according to a study by Ned Davis. By comparison, big blue chip shares have risen more modestly -- by 13.6%.
Since March 17, the S&P 500 index of small stocks has gained 9.3%, while the S&P 500 index of large stocks is up 8.8%. While this is encouraging, we'll need to see a more convincing and prolonged trend before we can declare that the growth-stock market rally will lift a broader base.
VIRTUALIZATION: A HIGH PRIORITY
The message we've been receiving from the IT world is clear: Corporations are spending on the essential hardware and software, but they are being very careful when it comes everything that falls below that threshold.
In a depressed business spending environment, virtualization is one of the only software spaces showing an increase in corporate purchasing going forward. The prime reason virtualization remains a high priority in IT planning is because it's a means of delivering efficiency and cost savings to the data center.
According to VMware (VMW), for every server virtualized, customers can save about 7,000 kilowatt hours (kWh), or four tons of CO2 emissions, every year. VMware has virtualized more than 6 million server workloads since 1998, resulting in an estimated energy savings of nearly 39 billion kWh -- or about $4.4 billion -- roughly equivalent to the total energy consumption of Denmark for one year!
Recent ChangeWave Alliance surveys have shown a sharp slowdown in U.S. business software spending, and our April results are no exception. However, the bright "green" spot in the midst of all this gloom is increased corporate spending on virtualization.
Now, let's take a look at the key company trends in the virtualization space.
VMware Share Skyrockets
VMware has strengthened its domination over the virtualization software market -- with its share rising 12 percentage points in our latest ChangeWave survey (from 58% in January to 70% currently).
None of the other major competitors have exhibited anything like this explosive growth. We note, however, that Citrix Systems (CTXS) also showed a strong five-point move to 26% in current share, while Microsoft (MSFT) jumped three points to 22%.
Customer satisfaction results also bear out VMware's dominating position in the industry -- 56% of its customers said their firm is "very satisfied" with VMware's virtualization products, the highest rating among major vendors. IBM (IBM) came in second with 49%.
Citrix (25%) and Microsoft (12%) received significantly lower satisfaction ratings.
Momentum for VMW and CTXS
Finally, we asked about which virtualization vendors companies are planning to purchase or upgrade virtualization software or services in the next six months. VMware once again reigned over the competition.
Looking ahead, while 12% said their company will purchase virtualization products in the next six months, among this group VMware has better than a four-fold lead in planned purchases over its next closest competitor, Microsoft.
VMware remains the clear leader here, with a skyrocketing current market share and extremely strong planned purchasing momentum going forward. And it's still early in the game for VMW, which has several catalysts on the horizon including virtualization increased OEM channel distribution, broader deployments in the enterprise and virtualization in other technologies beyond servers.
However, competitor Citrix, although it has a much smaller presence in the space, showed the greatest momentum going forward in our latest ChangeWave survey.
So, do we have the basis for recommending Citrix and returning it to our portfolio?
For now, it's a tough call. To help us decide, we're going to investigate Citrix more deeply in our upcoming IT spending survey before coming to any conclusion. Stay tuned for the results.
CISCO KEEPS ITS EDGE
Our modestly cautionary heads-up last week for Cisco Systems (CSCO) struck the right note, as the big networking tech giant reported solid results, but provided guidance consistent with what its CEO characterizes as a "challenging environment."
Driven by solid expense controls, Cisco reported fiscal Q3 EPS of 38 cents, beating the consensus estimate among analysts by two cents. Revenues rose 10% to $9.8 billion, slightly ahead of the consensus. For gross margins, too, Cisco edged out expectations with a 65.4% result.
Guidance was in-line and CSCO's macro outlook was unchanged, with U.S. weakness expected to persist for a few more quarters. Given the cautious spending environment in IT land, Cisco's performance was good enough to prevent any negative repercussions from spreading to tech stocks.
While the U.S. and European markets continue to show softness, Cisco's numbers were counterbalanced by strong demand in the Asia-Pacific region and emerging markets.
Cisco expects that it will be a few quarters before it returns to the higher end of its top-line growth rate at 16%-plus. In the meantime, at least Cisco has allayed the worst fears of investors that the tech sector was deteriorating even further.
Still, Cisco -- much like Apple and RIM -- is the exception rather than the rule. Recently, networking technology firm JDS Uniphase Corp. (JDSU) missed top-line expectations for its fiscal Q3 and delivered weak guidance for the next quarter, while Alcatel-Lucent (ALU) notched a fifth-straight quarterly shortfall, hit by lower capital spending by its customers.
Once we review the results from the Alliance's quarterly IT spending and corporate sales surveys, we should have a much better idea of the likelihood of a full tech rebound.
Cisco dominates several market segments, while it continues to expand market share. So as demand begins to pick up, you can be sure that Cisco's share will do the same.
We reiterate our Buy Under price of $27, and the stock is a strong buy under $24.
STELLAR RESULTS FOR ENER
Confounding its long-entrenched critics and serving up a sweet surprise for its investors, Energy Conversion Devices (ENER) last week reported quarterly results that blew away even the most optimistic expectations.
In the month of May, ENER shares are up 58% to close today at $51.62 -- its highest level since the 1980s.
Revenues for its fiscal Q3 rocketed 155% to $70 million versus the $66.7 million consensus among analysts. But more impressive was ENER's bottom line -- EPS of 25 cents -- which smashed the consensus estimate by 31 cents.
The company issued in-line guidance for fiscal Q4, seeing Q4 revenues of $73 million to $78 million versus the $73.13 million consensus.
Looking ahead, Energy Conversion provided these highlights in its conference call:
* It expects solar production growth of 15% in Q4, and expects to double production in 2009.
* New manufacturing lines are ramping faster than expected.
* It's on track to lower costs 50% to 60% in 2008 compared to 2007.
It's noteworthy that the U.S. market represents a very small portion of ENER's solar business. Actually, concentration in the United States has declined from 30% in Q2 to 25% in Q3. ENER does not have a residential product -- they focus on the commercial space and are sold out on that, seeing no signs of a slowdown.
The shares have left our Target Price of $40 in the dust. Given such a price spike, we think it's wise to sell 50% of your position, capture a nice profit, and reallocate the proceeds in another area of our portfolio.
LDK RAISES OUTLOOK
After today's close of market, LDK Solar (LDK) reported its Q1 financial results and revised its guidance for the current quarter and full-year -- and the numbers look good.
With an EPS of 45 cents, LDK beat consensus estimates by six cents, while revenues rose 21% to $233 million, also ahead of consensus. The company said that total wafer shipments increased 27.6% to 119.2 megawatts (MW) in the first quarter.
Looking ahead to Q2, the company issued upside guidance on revenues of $278 million to $288 million. Analysts, on average, were expecting revenue of $258.1 million. Wafer shipments are expected to be between 136 MW and 146 MW.
For fiscal year 2008, LDK sees revenues of $1.08 billion to $1.18 billion versus the $1.08 billion consensus. Wafer shipments are expected to be 560 MW to 580 MW.
The company raised its targeted annualized capacity to 1.1 gigawatts (GW) by the end of 2008, and 2 GW by the end of 2009. Since the start of 2008, LDK has signed six long-term wafer supply agreements.
Once we review the conference call, we'll get a better look at some of the operational details. For now, we recommend you keep holding the stock as LDK continues to benefit from robust global demand for solar energy.
Nevertheless, we're sticking with our Buy Under price of $30 and adjusting our target to a more attainable $75.
FRESH MONEY PICKS
As we've noted today, several of the stocks in the ChangeWave Investing portfolio have climbed substantially higher during the past few months and outperformed the broad market indices by a dramatic margin.
While the economic environment continues to be a challenging one, we remain bullish on recent winners such as Apple, Research In Motion, VMware and Energy Conversion Devices. But given their respective gains to date, we want to guard against new subscribers jumping into the fray after such moves. Instead, we suggest that you turn your attention to other stocks in our portfolio that offer potentially better values and, ultimately, bigger upside returns.
Based on the strong momentum in the solar industry and the Clean Tech Wave, we recommend these three stocks as good places to invest fresh money:
* Echelon Corp. (ELON) -- Buy Under $15
ELON's LonWorks technology platform is well established, and the global movement toward greater energy efficiency in buildings will help to reignite momentum in this oversold stock.
* Orion Energy Systems (OESX) -- Buy Under $12
The Alliance's recent corporate energy usage survey provided a compelling case for this supplier of innovative lighting systems for corporations.
* Yingli Green Energy (YGE) -- Buy Under $26
A recent new buy recommendation, this integrated solar firm is one of the best values among all solar energy plays.
ASK TOBY: CANADIAN ENERGY TRUSTS UPDATE
Toby discusses the likelihood of the Canadian energy trusts in the ChangeWave Investing portfolio converting to a master limited partnership (MLP) structure.
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.
FREE SESSIONS LIVE FROM THE VEGAS MONEY SHOW
We know many of you can't attend the Las Vegas Money Show, so we wanted to give you the opportunity to watch these important sessions in the comfort of your home or office.
Sign up today to watch these sessions broadcast live:
Double Your Portfolio Value in the Bull Market of 2009
Tuesday, May 13, 11:30 a.m. - 12:15 p.m., Pacific Daylight Time
What's the Next Mega-Trend?
Wednesday, May 14, 11:30 a.m. - 12:15 p.m., Pacific Daylight Time
FREE SUBSCRIPTION TO EQUITIES MAGAZINE
Toby is being featured in the May issue of Equities Magazine, and the nice folks over there are offering ChangeWave Investing subscribers a free one-year subscription.
Equities Magazine has been around for 57 years, covering a wide range of issues that affect investors worldwide. Get the latest on industry trends, strategies and opportunities, and read profiles of emerging public companies and financial leaders -- including Toby.
Sometimes the best things in life are free!
Don't miss this opportunity. Sign up for your free one-year subscription to Equities Magazine today.
GET YOUR FREE TICKETS TO THE LOS ANGELES TRADERS EXPO
Don't 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