Tuesday, December 28, 2010

Is CSC on the verge of better things?

Computer Sciences Corp (CSC) popped up this weekend on one of our screens at Alert HQ Premium. It was on the short list of stocks that had just raised their dividend and that showed value stock characteristics.

CSC just increased their dividend by 33%, going from $0.60 to $0.80. The valuation measures are quite attractive: trailing PE less than 10, PEG = 1.12, Price to Sales less than 0.5, Enterprise Value/EBITDA less than 4.

Better things on the way?

First, the technical picture. CSC appears to be in the process of breaking out. It has pushed above its 200-day moving average. In addition, its 50-DMA has achieved a bullish crossover above the 200-DMA though, truth be told, by only one penny. The chart below shows the situation. Another half a buck and the stock will be breaking above the previous recent high. That higher high would be a confirmation of a bullish trend..


Looking back at the company's financials over the course of the last year, the results have not shown accelerating earnings or revenues. On the contrary, sales and earnings have been stuck in a narrow range.

Is it possible that CSC is turning the corner? Can some of the company's latest initiatives finally begin to yield results? Will the company start to show better results in some of its traditionally strong segments?

As background, CSC provides consulting, systems integration and design, IT and business process outsourcing, applications software, web and application hosting to its clients in industry and government domestically and internationally. All things being equal, an improving economy should translate into growth in all these sectors. With legislators tightening the purse strings, however, government clients may not be as plentiful as the company would normally expect despite CSC's contention that improved IT efficiencies will increase productivity and reduce costs for governments.

What is interesting is that the company is pushing into some newer areas that have the potential to pick up the slack. The company is now touting its capabilities in the following currently hot areas:
  • cloud computing
  • health care billing systems and electronic records management
  • cyber-security
None of these initiatives will yield overnight success but, given that these areas are where industry attention is focused, they should allow CSC to position themselves for improved future growth. In the meantime, company management has increased expected earnings for 2010 by $0.05.

In summary, the story on this stock is future potential while the downside is limited by its reasonable value characteristics. CSC seems like another good candidate for your watch list.

Disclosure: no position at time of writiing



Wednesday, December 22, 2010

IT spending to increase in 2011 -- how should you invest?

A big part of overall technology industry profit is driven by spending in the Information Technology sector. Information Week recently released the results of a survey that provides a glimpse into 2011. The following chart summarizes the results of the survey:


The good news is that a total of 55% of of the 552 respondents do expect to see budgets and spending rise next year. Last year the number was 45% so we see continued improvement. Only 19% expect to cut IT budgets compared to 24% of respondents in the previous survey. Finally, 26% expect to keep budgets flat compared to 30% previously. The biggest increase was seen in the group expecting to increase spending to rise 5% to 10% which went from 16% up to 27%. Supporting these budget expectations is the fact that 59% of respondents report growing demand for IT services at their companies.

This next chart shows where IT investments are expected to be made:


In general, every category is expected to see a modest increase. At the top of the list however, is virtualization. That suggests VMWare (VMW) should have a good year in 2011 as they are the leaders in the virtualization field.

The next category, data center infrastructure hardware, is much more varied in terms of the players. Companies including IBM, Dell, HP and recently Cisco are competing to supply servers. Cisco, Juniper, HP again and others are active in the networking sector. It becomes harder to determine a winner in this category. As a result, an investor might want to consider one of the hardware focused ETFs such as the Merrill Lynch Internet Architecture HOLDRs (IAH).

Then there is a plethora of semiconductor companies that support all the hardware vendors mentioned above. There is a good choice of ETFs here including the iShares S&P GSTI Semiconductor Index Fund (IGW), PowerShares Dynamic Semiconductors Portfolio (PSI), SPDR S&P Semiconductor ETF (XSD) and Merrill Lynch Semiconductor HOLDRs (SMH).

Back-office software is expected to improve and here we would expect to see continued strength in Oracle, currently the leading company in that sector; however, there are certainly many other players including Salesforce.com, Microsoft and SAP. Again there are several ETFs that cover the sector well including the iShares S&P GSTI Software Index Fund (IGV), Merrill Lynch Software HOLDRs (SWH) and PowerShares Dynamic Software Portfolio (PSJ).

If you can't decide on a particular sector, there are always a number of broad technology ETFs, most of which have the advantage of trading large daily volumes. The most well known are the iShares Dow Jones U.S. Technology Sector Index Fund (IWY) and the Technology Select Sector SPDR Fund (XLK).

Finally, if you want to truly focus on IT, there is the Vanguard Information Technology ETF (VGT). This ETF includes all the stocks listed above plus various outsourcing/consulting companies, a number of chip makers and even Apple (the ETF's largest holding), Mastercard and Visa. As the weekly chart below demonstrates, this ETF has performed quite well and is at 3-year highs.


Based on the results of the Information Week survey, VGT has a good shot at hitting further highs next year. This should be one of those times where buying on a pullback could be a very good strategy.

Disclosure: none

Source: Outlook 2011: IT Trends to Watch



Wednesday, December 15, 2010

Intevac -- breakout in progress, more room to run?

One of the stocks that popped up on Alert HQ earlier this week is a tech stock that looks a lot like a value stock. I'm talking about Intevac (IVAC).

Intevac is a small cap stock that has broken out in a big way. It's up over 50% from its most recent low in mid-September. The question is, however, is it now over-priced?

First, let's take a look at the weekly chart:


You can see that it's gone from around $9 to almost $15 which is a sizable move. A pull-back seems almost inevitable. Yet, after that potential pull-back runs its course, there could be room for further gains. Here's why:

The basic scenario is that this stock currently looks like a value stock. If it is perceived to be a growth stock, then there is opportunity for its multiple to increase.

Let's take a look at the financials and establish its value qualifications. Here are some valuation characteristics:
  • Trailing PE is 11.48, which is quite reasonable for a tech stock. Forward PE is 17.61 which is not excessive.
  • PEG is only 0.9 which is in a range considered to be good value
  • Price to Sales and Price to Book are both about 1.6, again good value
  • Enterprise Value/EBITDA is less than  6 which is definitely value territory
  • Ratio of  Enterprise Value to Free Cash flow is 8 which is in the value sweet spot
  • The company has virtually no debt
So the company is still quite reasonably priced thus far. Is there a growth pattern appearing that will allow the stock price to continue it's climb? Here is the chart from Google Finance:

There has been a big jump in both revenue and earnings from Q2 to Q3 but a slowdown in growth from Q3 to Q4. If the company can just resume modest growth from current levels, there should be room for stock price appreciation. What factors might provide investors some confidence that this might actually happen?

Management effectiveness seems to be pretty good. Return on Assets and Return on Equity are both in double digits which suggests that management is providing good returns for shareholders.

What about the company's product mix and industry outlook? Intevac is a major player in the manufacturing of magnetic media for disk drives. Over 60% of the world’s hard disk output is produced on Intevac systems. The companies solar processing segment is involved in providing manufacturing and inspection platforms for thin film solar cells. The photonics segment is involved in sensors, specialized cameras, night vision, material identification (including biologic and explosives detection).

The good news is that in the age of pervasive computing, PCs are not the only products that use disk drives. Everything from iPods to massive enterprise data center disk storage systems need magnetic media. As the volume of data continues to grow nearly exponentially, in the cloud, in the data center and in your hand-held devices, it would seem that Intevac is in a good position as the major supplier of disk manufacturing systems.

Similarly, sensors of all kinds are proliferating so the company's photonics segments has a shot at doing well in the niches servicing the law enforcement, pharmaceutical, industrial inspection and laboratory markets.

Thin film solar cells are considered to be the latest, leading edge technology in the photovoltaic industry. It is promising that Intevac is involved in thin film manufacturing and inspection systems at this point in time and that perhaps the company can leverage this into a leading position.

All in all, the company is priced reasonably and still has the potential to follow through on its recent breakout. It's worth it for investors to keep an eye on Intevac and be ready jump in if the company begins another leg up.

Disclosure: no positions at time of writing



We'd like to hear what you have to say!

For anyone who has tried the Trade-Radar Stock Inspector, I have set up a facility that will allow you to give your opinion. I now have a survey page available.

Basically, I am very interested in hearing what new features users might like as well as anything that users feel really needs improvement.

Even if you are not a user of the software but would consider using it if it could do something you need, go ahead and tell me your ideas. I am open to all suggestions.

The survey page is available on the drop-down menu associated with the "Stock Inspector" menubar item. Or, you can just click on the following link:


With the current version of the software fairly stable, it is time to look for improvements. I look forward to hearing your ideas.



Saturday, December 11, 2010

ETF Trending Report -- one sector to avoid, one sector to consider

One of the first things I like to check every weekend is the ETF Trend Performance week-over-week report. It gives a great summary of what happened to more than 300 ETFs with respect to change in trend. (It is currently available at the free preview of Alert HQ Premium.)

Some weeks, ETFs in certain sectors dominate the top spots or the bottom spots and in other weeks it's a mix. This week it's pretty clear who the biggest winners and losers were.

The winners --

Financial ETFs held the top four spots this week. The following chart is from the report:

Change in Trend Score Symbol Name Current Trend Score Change in Price Percent Change in Price
3 UYG ProShares Ultra Financials ETF 5.5 4.05 6.71
2.25 IYG iShares Dow Jones U.S. Financial Services Index Fund 4.25 2.55 4.67
2 RKH Merrill Lynch Regional Bank HOLDRS 4 4.02 5.05
1.5 XLF Select Sector SPDR Fund - Financial 4.75 0.58 3.82

Given the highest possible trend score is only 6 (denoting a very strong bullish trend), an improvement of between 2 and 3 is pretty significant.

The following chart shows IYG. Trend lines are drawn in blue. You can see that the down-trend seems to have ended and an up-trend seems to be solidly underway.


For these ETFs, even after a big gain in trend score, there is still room for further improvement.

The losers --

Bonds are clearly in trouble. The following 8 ETFs all registered a noticeable decline in trend score even while the overall stock market showed a weekly gain. The following chart list them all:


Change in Trend Score Symbol Name Current Trend Score Change in Price Percent Change in Price
-1 TIP iShares Lehman TIPS Bond Fund 3.25 -2.35 -2.16
-1 TLT iShares Lehman 20 Year Treasury Bond Fund 1.5 -1.74 -1.83
-1 VCIT Vanguard Intermediate-Term Corporate Bond ETF 3.25 -1.36 -1.7
-1 VCLT Vanguard Long-Term Corporate Bond ETF 2.25 -0.44 -0.56
-1.25 VGLT Vanguard Long-Term Government Bond ETF 1.75 -1.39 -2.26
-1.5 IEF iShares Lehman 7-10 Year Treasury Bond Fund 2.25 -2.41 -2.51
-1.5 VGIT Vanguard Intermediate -Term Government Bond ETF 2.75 -1 -1.6
-2 AGG iShares Lehman Aggregate Bond Fund 2.25 -0.96 -0.9

Whereas the problems in the bond market started with municipals and 30-year Treasuries, you can now see that corporate bonds are getting hit, too.

Conclusion --

As much as I dislike the financial sector, perhaps a recovery is actually on the way and this isn't a head fake. After all, these results are based on weekly data so perhaps the move has some real strength. We shall have to see.

As for the bond ETFs, in mid-October I wrote a post titled "Has the bond bubble burst? ETF trending provides a clue". At that time I used daily data and the post met with some skepticism. Today's trend score results provide confirmation that bonds aren't getting any better.



Thursday, December 9, 2010

How much longer for the semiconductor rally?

Two of the leading ETFs on the Trade-Radar ETF Scorecard report at Alert HQ Premium are semiconductor ETFs, specifically the Merrill Lynch Semiconductor HOLDRS (SMH) and the ProShares Ultra Semiconductors (USD).

Both of these ETFs carry the highest possible score for maintaining a bullish trend. As an example, take a look at the chart of SMH below:


How long can this go on?

KPMG conducted a global survey of semiconductor executives. Most of the results are quite positive. Executives expect mid-single digit improvements in hiring, R&D and profitability in 2011 compared to 2010. That sounds good but in actuality, 2010 was a very strong year and the outlook for 2011, while quite decent, reflects a potential moderation in the pace of growth.

In particular, the surveys indicates only 39% of executives expect revenues to increase by 10% or more whereas 54% expected 10% revenue gains in 2010. Similarly, 37% of respondents anticipate profitability growth in excess of 5% for 2011, while a year ago 76% expected that level of growth for 2010.

More ominously, survey results show that 53% of respondents anticipate the semiconductor cycle will peak within the next 12 months.

It's OK to ride the trend but investors should be alert and exercise caution. Note that just today (Thursday, 12/8), National Semiconductor (NSM) reported Q2 EPS of $0.34 (+78%) which beat estimates by $0.02. Revenue was $391M (+13.3%) vs. $400M. In after hours trading, shares initially fell 8% before recovering somewhat to -4.7%. The drop was attributed to a weak revenue forecast that came in significantly below analyst expectations. This just goes to show how volatile the chip sector can be and it may also be an early confirmation of the more downbeat predictions of these survey respondents.



Thursday, December 2, 2010

Labor shortages in the most populous nation on earth?

Factory workers in China
Earlier this year there were a series of articles in several mainstream newspapers and magazines and on a number of blogs that described labor shortages occurring in China. At the time, I missed all these articles but now I've seen the topic pop up on a couple of tech sites that I visit and I became interested.

Accordingly, this post is not intended to provide a specific piece of investment advice but is more an exploration of a news item that I thought might be worth exploring since many of us are focused on China as the engine of the global economy.

On the DigiTimes web site, an article declares that China's labor shortages are worsening, particularly in the eastern region. Labor shortages are now an annual issue, but the problem has occurred earlier this year and is more severe. The situation is expected to get worse before the Lunar New Year (in February). In particular, the authors quote managers of electronics firms involved in manufacturing flat panels and related components.

One of the companies mentioned in the article indicated that orders for November and December are even higher than those in October, which registered record monthly sales, but the labor shortages could affect sales in the last two months of 2010.Essentially, they are implying that they cannot accommodate all the business that is available.

The component makers indicated that labor shortages typically worsen as the Lunar New Year approaches and many workers return to their hometowns. Most laborers should return after the holidays but some will decide to stay home. Though the labor shortages will ease, manufacturers will have to continue to monitor the issue.

Land of migrant workers?

I never realized this, but many Chinese factory workers are actually migrant workers. In China's case, migrant workers go from the country to work in factories in cities. In contrast, what we are familiar with in the US is that migrant workers end up in the country working in farmers fields.

There are several reasons contributing to labor shortages beyond holiday vacations. The cost of living in factory towns and cities has increased dramatically while wages have not nearly kept pace with price increases. Many workers feel it is just not worth it to leave their hometowns and families behind in order to work for wages that, after subtracting basic living expenses, leave little left over for savings or discretionary spending. In the meantime, more and more young people are getting college degrees and are unwilling to work in factories for low wages. This further reduces the pool of potential factory workers.

These cost of living issues are foremost among the many important reasons why the Chinese government and central bank are actively taking steps to slow inflation. And factory managers are finding that they need to offer more competitive wages.

Slowing inflation reassures the workers they will have some money left in their pockets after payday. Increasing wages will help transform China into more of a consuming economy instead of single-mindedly being a manufacturing/exporting economy. Reducing labor shortages allows Chinese manufacturers to avoid turning down orders. If the government is successful in taming inflation and workers get raises, it could be a win-win situation. With respect to the manufacturers, however, it remains to be seen whether increased sales will offset higher wages.

Given the lag in the effects of government actions and the pace at which wage increases are being rolled out, some company managers are choosing to build new factories further in the western, more rural part of China instead of in the crowded, high-cost eastern half. This, in turn has its own effects, some of which are actually very good. It reduces the need for workers to live a migratory lifestyle. It makes it worthwhile for China to continue its binge of infrastructure projects, especially the energy and transportation projects (which also happen to provide jobs), in order to make the west more friendly to manufacturing and hi-tech. This will spread prosperity more evenly across the country and reduce social tension between rural and urban and east and west.

If labor shortages persist, I wonder how China will respond. It's clear that they are reluctant to allow anything to impede the manufacturing juggernaut that has resulted in China being called the world's factory.  Will Chinese companies begin to build factories in other countries? Will China invite in foreign guest workers like Germany did? Similarly, if labor costs increase, will China act like the US and send the jobs to the next lower cost country like perhaps Vietnam?

It's a complex issue and an important one now that China has assumed such a significant place in the global economy. It will be interesting to see how China deals with the situation.

Disclosure: no positions




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Disclaimer: This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.




 
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