Lucent Needs Some Loving

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Article discusses the problem with Lucent Technologies. This former Wall Street darling has been discarded by the herd and is now looking for some love on the Street
tocks,investing,trading,options,technical analysis,george leong,money,finance,small cap stocks
Lucent Technologies Inc. (NYSE/LU) is a stock that needs some major loving. This former Wall Street darling has been discarded by the herd and is now looking for some love on the Street. Trading at nearly $80 in late 1999, the stock like many others in the communications sector has been under severe pressure in recent years, facing lackluster revenue growth and anemic profits.

Lucent has also gone through its share of lawsuits. Despite some recovery in the communications sector, the area remains a difficult place to operate. The competition is fierce, pricing pressures are growing, and margins are low.

That is the reality for the communications sector, an area that remains in limbo given the current climate. So what is Lucent suppose to do? Shareholders have lost patience in the ability of chairman and CEO Patricia F. Russo in turning around the company and making it a star again.

Down 96% from its late 1999 high, the reality is investors who bought at that level or even lower will probably never recover their losses. Lucent will never be more than a capital loss for those that purchased at the higher and inflated prices.

The company is making money and its forward price-earnings multiple is reasonable, but given the slow expected growth the stock upside may be limited.

Given the mixed outlook for the communications sector, Lucent is trying to get a major hug from rival and also troubled France-based Alcatel SA (NYSE/ALA).

Lucent after being rejected already by Alcatel in 2001 is hoping this second attempt is met with hugs and kisses, something they love to do in France.

Alcatel is reviewing the potential merger with Lucent, but it is in the driver seat as its position is much better than that of Lucent. In other words, Lucent needs Alcatel more.

But for Alcatel, a merger with Lucent could give the company more exposure and an established network in the United States.

The deal if consummated could be the first of many more to come as struggling telecom companies look for ways to cut cost and compete more effectively.

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Dow Turns Moderately Bearish

947
This article talks about the stock markets from a technical pont of view.
stocks,investing,trading,options,technical analysis,george leong,money,finance,small cap stocks
In trading yesterday, only the tech-laden NASDAQ avoided the selling, edging up 3.04 points to hold at above 2300 and its five-year high. As I have said, breadth in the NASDAQ has improved.

The DOW was the big loser on the day giving up 65 points or 0.58% to fall to 11,150.70, which is just below its key short-term 20-day moving average, a warning. The S&P 500 lost 2.64 points. The near-tech technical signals for these two indices are the weakest of the four indices.

Small-cap stocks continue to hold after breaking to a new historical high on Wednesday. The Russell 2000 fell 1.58 points or 0.21%, which is positive given the extreme overbought condition. The barometer of small-cap performance is up a healthy 13.28% this year. While impressive, I question whether the index can maintain this rate of appreciation.

In commodities news, the May light crude futures on the NYMEX broke above $67 a barrel on Thursday. The near-term signals look relatively bullish and the minor trend is positive. The breakout materialized after a Rectangle formation at between $61 and $65.50. Oil could move towards the $70 level, last encountered in February, if it can hold at $65.50-$66. But watch for some selling pressure as the contract is overbought. High oil prices will pressure stocks.

Trading in the NASDAQ has come in at over 2 billion shares in the last three straight sessions. Trading volume on the NASDAQ came in at about 2.22 billion shares yesterday, above its 5-day and 10-day moving averages of 2.11 billion and 2.18 billion shares, respectively. The strong volume in yesterday marginal up day is encouraging following a strong volume breakout on Wednesday.

On the NYSE, daily trading picked up yesterday. Trading on Thursday was 1.61 billion shares, above the 5-day and 10-day moving averages of 1.55 billion and 1.55 billion shares, respectively.

The near-term technical picture for the NASDAQ is bullish but is showing some potential weakening. The Relative Strength remains relatively strong, suggesting more gains if it can hold. The index is holding at above its previous pivot point of 2332.95 and its five-year high of 2333, a bullish sign. The index is trading at above its 20-day and 50-day moving averages of 2297 and 22854, respectively.

The MACD continues to flash a moderate buy signal. The MACD trend is negative but has reversed course. The upside break was bullish after largely trading in an intermediate term sideways channel. Now we will see if the NASDAQ can hold and edge higher towards 2366 and 2387. The index is now marginally overbought so watch for some potential selling pressure.

On the blue chip side, the near-term signs for the DOW weakened further and are now moderately bearish. The intermediate trend is bullish but yesterday break below its 20-day moving average of 11,156 is a warning and could signal further deterioration if it cannot hold. The Relative Strength also fell to below neutral, showing a potential lost of momentum. The MACD turned bearish yesterday and is flashing a moderate sell.

The key for the DOW is whether it can hold at around its 20-day moving average. Indications suggest further weakness, albeit the selling has created a near oversold condition. Failure to hold could drive the DOW down to 11,092, 11,077 and 50-day moving average at 11,016. A rebound could see the DOW move back to above its 20-day moving average and a pivot point at 11,234.

The Bollinger Bands on the DOW are trending upwards and widening, indicating increased volatility in the near-term. Watch this.

On the S&P 500, the near-term picture is neutral to moderately bullish. The Relative Strength weakened yesterday and is marginally above neutral. The index is trading at above its 20-day and 50-day moving averages of 1,294 and 1,283, respectively. The MACD is neutral.

Near-term targets are 1,310 and 1,333. The index needs to hold at its 20-day moving average or we could see weakness.

On the small-cap side, the Russell 2000 is bullish. The Relative Strength is relatively strong but watch if it can hold. The recent break above the previous pivot point of 745.18 was positive. The trend is positive with higher highs and lower lows.

Watch if the Russell 2000 can trend higher but given the buying, the index is extremely overbought. The MACD is positive and appears to have reversed the downtrend.

The next area of resistance for the Russell 2000 is 772 and 803.

The advance-decline line on the NYSE (0.77:1) continues to be mixed, coming in at below 1.0 yesterday. The NASDAQ (1.004:1) managed to hold at above 1.0. The daily A/D reading on the NASDAQ has been above 1.0 in 7 of the last 10 sessions. The 5-day moving average for both the NYSE (1.27:1) and NASDAQ (1.42:1) remains above 1.0.

The market is continuing to show bullish sentiment. The new high new low ratio (NHNL) for the NASDAQ came in at above the bullish 70% level for the 14th straight day, coming in at 89.35%. The NHNL ratio on the NYSE (82.69%) has been above 70% for the last 15 straight sessions.

The current technical picture for the four key indexes is as follows:

NASDAQ: Bullish; Relative Strength: Above Neutral; Marginally Overbought

DOW: Moderately Bearish; Relative Strength: Below Neutral; Near Oversold

S&P 500: Neutral to Moderately Bullish; Relative Strength: Neutral

RUSSELL 2000: Bullish; Relative Strength: Relatively Strong; Extremely Overbought

Here is what to watch for on Friday.

The DOW faces more selling pressure as its near-term technical picture is moderately bearish and the weakest of the four indices. Watch for potential support as the index is nearly oversold.

Tech and small-cap stocks continue to show the strongest technical strength but watch the extremely overbought condition in the Russell 2000 and marginally oversold condition on the NASDAQ.

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Lexar Bid is Inadequate

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Article looks at Micron’s takeover bid for Lexar, which is too low.
stocks,investing,trading,options,technical analysis,george leong,money,finance,small cap stocks
On Friday, flash media maker Lexar Media (LEXR) received a higher revised takeover bid from Micron Technology (MU). The revised bid places the all-stock exchange offer at around $10 a share, up marginally from the initial bid.

But major shareholders including billionaire investor Carl Icahn along with hedge funds and portfolio managers have deemed the initial bid to be inappropriate. Elliott Associates believes the initial bid “significantly undervalues Lexar,” and feels Lexar is worth between $1.5 billion and $2.4 billion. The estimate is well above the revised takeover bid of about $827 million.

I must concur and say the revised takeover bid is way too low and needs to be rejected by shareholders. Micron wants to pay around 1.10x sales for Lexar while the market leader SanDisk (SNDK) is trading at 4.35x sales. Lexar also has a $400 million patent infringement lawsuit against Toshiba that it had previously won but is now subject to an appeal by Toshiba.

Think about it this way, a successful $400 million settlement in favor of Lexar would equate to around $4.83 per share in additional cash to add to the current $0.54 in free cash after debt that Lexar has. This means Micron would pay less than $5 a share for Lexar assets, which is low.

There is also speculation that SanDisk is seriously thinking about taking a run at acquiring Lexar. This would make sense since SanDisk would solidify its leadership position.

Moreover, SanDisk has a close working relationship with Toshiba, which could see SanDisk drop or reduce the settlement if it managed to acquire Lexar.

Stay tune. A special shareholder meeting to review the takeover bid has been moved to June 16. In my view, the $10 bid undervalues Lexar. Question is will a white knight surface?

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Blockbuster Miscalculated

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Blockbuster (BBI) is a perfect example of what can go wrong when you misread the industry trends and then realizing it, try desperately to catch up.
stocks,investing,trading,options,technical analysis,george leong,money,finance,small cap stocks
Blockbuster (BBI) is a perfect example of what can go wrong when you misread the industry trends and then realizing it, try desperately to catch up. In the period from late 2001 to 2002, Blockbuster was the leader in the video rental business. Its shares were trading at nearly $30 a share and its market-cap was at around $5.75 billion.

But there was a trend developing towards movie rentals via the Internet. Blockbuster failed to recognize the growing significance of Internet video rentals, a very poor miscalculation on its part. The shares have steadily declined to the current $3.80 to $4.20 channel. Once a large-cap, Blockbuster is now a small-cap and struggling to regain any sense of direction. The company has entered into the Internet DVD rental business but it has a lot of catching up to do.

Fundamentally, Blockbuster has lost money in the last three straight quarters and struggling to grow its revenues, which are forecasted to increase a mere 1.1% in fiscal 2006. Its estimated five-year earnings growth rate is a mere 2.5% per annum, which is pitiful.

Blockbuster also has to deal with its massive debt load of $1.27 billion or a debt-to-equity of 2.73:1, which suggests a weak balance sheet. Couple this with poor working capital and you understand the high financial risk. Faced with stagnant revenue growth and losses, Blockbuster faces a difficult upside battle to regain its lost glory. The odds are stacked against it.

In the face of Blockbuster is online DVD rental company Netflix (NFLX), which debuted in May 200, trading at close to $40 in 2004 before sinking to the $10 level in 2005 before the rally.

Netflix saw the future for DVD rentals and it was online and not via the “brick and mortal?route that Blockbuster decided to maintain. In direct opposite to Blockbuster, Netflix is profitable and has been for the last three straight quarters. It has 4.2 million subscribers and growing. Its revenues are growing and expected to surge 32.5% in fiscal 2007 whereas Blockbuster is seeing non-existent revenue growth.

Blockbuster has entered into the online DVD rental arena but it is well behind Netflix. Moreover, Netflix also operates the online DVD rental business for Wal-Mart Stores (WMT), after the retail giant decided to shut down its own online DVD rental unit and instead let Netflix run it.

Trading at 36.73x its estimated FY06 EPS, Netflix is not cheap. But if it can continue its strong growth and earn the estimated $1.11 per share for the FY07, the valuation becomes more reasonable. The pressure is clearly on Netflix to deliver but it is on the correct path.

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A Cheap Strategy to Play Microsoft

409
Articles takes a look at Microsoft and how you can play the stock with options.
stocks,investing,trading,options,technical analysis,george leong,money,finance,small cap stocks
Bill Gates is super rich but his once high-flying software company has been in the doldrums since mid-2002 after falling from the $35 level. The problem with Microsoft (MSFT) has been its failure to grow both its revenues and earnings at the superlative rates the company once enjoyed.

Any company the size of Microsoft, with a market-cap of $242 billion, will find growth an issue because of its size. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term software company and is cash rich with $34 billion or $3.28 per share in cash. This gives the stock plenty of financial flexibility to develop or buy growth technologies. Microsoft just announced it would spend $1.1 billion in R&D at its MSN Internet unit in the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of taking a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG).

But with an estimated five-year earnings growth rate of a pitiful 12%, the company has its work cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not expensive but appears to be priced not as a growth stock.

Its PEG on the surface of 1.51 is not cheap, but if you discount in the cash of $3.28 per share, the estimated PEG falls to around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.

The fact is Microsoft at the current price deserves a look. If you want to play the stock but don’t want to shell out the $2,347 for a 100-share block, you may want to take a look at the long-term options, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire until January 18, 2008 currently costs $380 a contract (100 shares).

This means you risk a total of $380 for the chance to participate in the potential upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make money on your LEAPS. Conversely, if Microsoft fails to do anything, your maximum risk is $380 on the initial option play.

Warning: The aforementioned example is for illustrative purposes only and not to be construed as an actual option strategy. Due to the higher risk inherent in options, I recommend you speak with an investment professional before deciding to employ any strategy involving options.

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