From Briefing.com: So the Nasdaq has strung together two consecutive negative sessions -- mark your calendar. Yet this recent sell pressure isn't entirely out of place in the context of that genuinely massive prior leg higher. Note that coming off the Nasdaq's opening level of 1489 on May 22nd, the index had returned as much as 13.1% in a matter of just twelve sessions.
From a technical perspective, the current outlook remains consistent with our assessment this morning. That is, the immediate bias remains consolidative within the context of this broader bullish bias. Note the near-term bias would improve to the extent the index can reestablish a posture above 1619 on a closing basis. To the downside, the Nasdaq's first broader support point currently rests in the vicinity of 1591 to 1595 -- this area appears to represent the first real candidate for a reversal of this bearish immediate bias.
Looking towards the remainder of the week, the identifiable catalysts are somewhat limited. On the economic front, continue to look for Retail Sales data due out Thursday morning at 8:30 ET, followed by the preliminary Michigan Sentiment number scheduled for Friday just after the market open at 9:45 ET.
On the corporate earnings front, the calendar is virtually vacant, though earnings pre-announcements should start making the rounds with more regularity the next several weeks. For a more detailed look at upcoming reports, please visit Briefing.com's Earnings Calendar and Economic Calendar. -- Mike Ashbaugh -- Briefing.com
Close Dow -82.79 at 8980.00, S&P -11.83 at 975.93, Nasdaq -23.45 at 1603.97: The stock market suffered sizable losses today as a number of valuation-related downgrades and uninspiring corporate announcements prompted traders to sell into the prior months' strength... Since their mid-March lows, the indices have raced higher by more than 20% amid expectations of stronger 2H03 economic and corporate growth... As such, the arrival of the June quarter "warnings" season has provided investors an easy opportunity to book profits...
Motorola (MOT 8.62 -0.27), in fact, cut its Q2 (June) earnings and revenue forecast and said lower-than-expected cellular handset sales in Asia could impact Q3 (Oct) and Q4 (Dec) results as well... Freddie Mac (FRE 50.27 -9.60) added fuel to the fire through its announcement that COO David Glenn was fired for not fully cooperating with auditors reviewing FRE's earnings statements from 2000 through 2002... Meanwhile, analysts suggested near-term, upside movement could be harder to come by through several stock downgrades based on valuation...
In particular, technology standouts QLogic (QLGC 48.95 -2.08) and Adobe Systems (ADBE 35.44 -1.85) were downgraded: QLGC by Goldman Sachs (to Underperform from In-line) and ADBE by Smith Barney (to Underperform from In-line)... Consequently, the equity market fell progressively lower throughout the day and finished near the worst levels of the session... Former rally leaders - such as financial, technology, and biotech - endured the brunt of the selling activity, although losses from an industry (as well as market-cap) perspective were broad-based... Separately, market participants shrugged off the 0.1% drop (consensus of +0.2%) in April Wholesale Inventories given its read on the war-impacted month...
Tomorrow's market should take note of Nokia's (NOK 17.96 +0.21) mid-quarter call before the open, particularly in light of MOT's reduced Q2 guidance...Nasdaq 100 -1.5%, Russell 2000 -2.0%, SOX -2.4%, S&P Midcap 400 -1.9%, NYSE Adv/Dec 1089/2234, Nasdaq Adv/Dec 1129/1066
3:43PM Ratings Review - SUNW 5.12 -0.08: An upgrade by one of Wall Street's favorites, Laura Conigliaro of Goldman Sachs, is not having its usual market-moving effect that investors have come to expect from this analyst's calls. Specifically, Ms. Conigliaro's upgrade of Sun Microsystems (SUNW) to In-Line from Underperform this morning has not elicited much of a reaction, as the stock is treading water right below the unchanged line.
The rating change was based on signs that the near-term business is no longer deteriorating, demand is stabilizing, and SUNW's valuation is below several of its peers'. Given signs that some of the company's key end markets have bottomed, Ms. Conigliaro believes SUNW is likely to see seasonal patterns that are closer to normal, which should cause the stock to generally track its peers.
So, why is it that SUNW's stock is not flying high after Ms. Conigliaro's seemingly encouraging comments? Several factors are at play here.
First, the analyst made a point of reiterating her earlier substantial secular concerns, pointing out that around 35% of SUNW's revenues come from financial services and telecom, which remain two of tech's most depressed sectors. Second, Ms. Conigliaro's call is hardly revolutionary as 15 other analysts rate the stock with an equivalent of a Hold. Two analysts have the equivalent of a Buy rating, while five analysts have the equivalent of a Sell recommendation. Finally, investors may be holding their horses in the face of SUNW's 5.7% appreciation on Friday, which followed a favorable note out of Sterling in which the firm reiterated its Buy rating and increased the price target to $7 from $5.
Keeping in mind the fact that the stock has more than doubled off its October low of $2.34, Briefing.com sides with the majority of analysts, who have stopped short of suggesting taking an aggressive stance on the shares at current levels. We would be inclined to turn more positive when evidence of a more meaningful acceleration in information technology spending surfaces. -- Victoria Glikin, Briefing.com
3:25PM QLogic (QLGC) 48.54 -2.49: Being one of the stronger technology stocks, QLogic (00C0) has been able to maintain sequential sales growth, solid margins and earnings growth. What did all of these good results get them? An upgrade, new coverage or a pick of the month designation? Well not quite. QLogic was downgraded by Goldman Sachs today, based on 'valuation.' The downgrade moves them from In-Line to Underperform.
In the note, Goldman leads with the idea that valuation has taken a backseat to momentum in the current market. This has caused QLGC's stock to rise to very high multiples, including a 37x multiple for next FY earnings. Goldman also notes that the rise in the stock has moved its P/S '03 to 9.5x and 11x LTM sales. These are both the highest in their group.
Another reason for the downgrade was that Goldman had concerns for the upcoming September quarter (1Q04). The coming quarter is the one with most risk for the HBA (host bus adaptors) market. While the implications of a poor quarter relate to all the companies in the HBA market, Goldman only downgraded QLGC, but more or less hinted that Emulex (ELX) was next in line. At the same time, Goldman goes on to say that they expect QGLC to beat their estimates for the coming quarter. The only concern is that the decline in its customers business might in turn affect QLGC.
The consistency of growth the Company has shown has earned it its high valuation, but the negative side of that high valuation and excellent performance is that the expectations are now even higher. This is really main issue that Goldman has with owning QGLC in the short-term. QGLC, which designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers, has posted 2% to 5% topline growth over the past three quarters. Goldman says that there is only a 35% chance that this streak will not continue.
This downgrade did carry some weight, as the stock is off a little more than 5% on the day. We feel that one more point made in the note should be discussed, and it's obviously a more important one if we talk about it last. In the beginning of the note, Goldman noted that it had to maintain its required distribution of ratings, and that there must always be at least 10% of followed stocks rates as Underperform. This particular downgrade was made in conjunction with the upgrade of Sun Microsystems (SUNW), making us wonder if just because of its past performance the Company was downgraded. SUNW was upgraded to In-Line from Underperform.
Briefing.com believes that the downgrade of QLGC is a short term move, and gives long term investors a nice pull back at which they will find a quality growth stock. It's very hard to suggest that investors purchase a stock that trades at 9.5x sales and 37x next FY earnings, but we are confident that QLGC will continue to post solid results as its model has yet to really show any weakness in an already weak environment. --Brian Bolan, Briefing.com
3:09PM Nokia Mid-Qtr Preview (NOK) 17.75 unch: While the MOT news is still fresh in everyone's mind, Nokia is scheduled to provide its mid-quarter update tomorrow morning with a Friedman Billings analyst suggesting the co will "tighten" its revenue guidance to the downside in light of the 5% move in the U.S. dollar relative to Euro while its EPS should remain -0.13 to -0.16. The analyst also suggests the co will likely reduce its 2003 mobile phone forecast due to growing Asian handset inventories and the SARS outbreak. UBS also shares the same concerns over the U.S. Dollar and SARS with its analyst expecting the Nokia Mobile Phone revenues to be up 5-6% year/year vs. firm's formal estimate of 7% for growth. In addition, the firm expects no material change to industry or company guidance.
11:58AM Technical Levels: So it looks like that Friday reversal may have raised a few eyebrows. Recall when we reviewed the Nasdaq on Friday, June 6th we addressed this prospect of inverse capitulation -- a session of panic-induced buy interest in which even the most bearish trader throws in the towel and goes long. As a rule, capitulation days are interpreted to 'wash out' the predominant near-term trend, laying the groundwork for a reversal of the immediate bias. (As a point of interest, note the practical implications of this prospective 'inverse capitulation' were initially addressed here in the May 30th review.)
Now in the early going Friday, the Nasdaq exhibited the markings of this underlying 'panic-induced' behavior. Recall off the session's open, the index carried this unusual disposition in which advancing volume outpaced declining volume by a truly off the chart reading of 31 to 1. At the same time, total volume was on pace to carve out yet another calendar-year record. By the end of the day, the Nasdaq reversed to close 57 points off its session high at 1684 -- the pronounced reversal came behind Nasdaq total volume of nearly 3.0 billion shares.
So this first chart is a fifteen-minute chart of the Nasdaq in which each bar on the chart represents the opening and closing levels for each fifteen-minute time frame. The primary point here ties into our bias parameters from the Friday review.
To provide context, the relevant passage from that June 6th review follows: "The 'real' question is how the indices respond to their respective breakout points at Dow 9,000 and Nasdaq 1619. If the indices can hold those areas on a closing basis, the near-term bias is likely to remain bullish. A reversal that would take the indices under those levels on the close would contribute to the case for a more neutral to bearish immediate bias. So from a practical standpoint, keep an eye on support in the very broad area of 1619 to 1632. The immediate bias improves or deteriorates based on its relationship to that general area."
The chart above illustrates that near-term 'bias range' spanning from 1619 to 1632. Note the general area is relatively cluttered with random levels of varying importance. Yet also note Friday's close placed the index comfortably in the middle of that 13-point range. So that price action Friday raised a flag as to the prospect of this additional follow through today.
To read the remainder of this review -- which addresses levels of interest on the S&P 500 -- please see the Stock Brief page. -- Mike Ashbaugh, Briefing.com
11:49AM Ratings Review - ADBE : Later this week, software company Adobe Systems (ADBE 35.23 -2.06) will be delivering its fiscal Q2 (May) earnings report. The market is expecting to hear good things - very good things. How do we know? A look at ADBE's stock chart suggests as much as the stock is up 28% from its March 12 close and up 114% from its 52-week low reached last August.
A performance like that, understandably, will turn more than a few heads in the investment community. Today, it has grabbed the attention of Smith Barney, which downgraded ADBE to Underperform from In-Line citing valuation. The firm said that it expects a solid Q2 from the company, but it also stressed that the recent appreciation in ADBE's stock price has stretched its valuation to 34.2x, which is near peak levels.
Smith Barney attributed the surge in ADBE's stock price to two quarters of solid financial performance and expectations for its just-released Acrobat 6.0 upgrade cycle. Interestingly, Smith Barney noted that in each of the last three launches ADBE shares peaked within a month of the new product launch. The firm added that, although a Photoshop upgrade is possible in Q4/Q1, the timing is uncertain and trends suggest caution is warranted.
ADBE's stock hasn't taken kindly to the Smith Barney downgrade as it is off 5.5% on heavy volume. At current levels, it is trading below Smith Barney's $36 price target. The weakness in the tech sector has, in all likelihood, compounded the negative response to the Smith Barney downgrade.
Since the broader market rally began in mid-March, valuation concerns, among other things, have provided the rationale for more than a few firms taking a cautious stance on ADBE. To that end, WR Hambrecht downgraded ADBE on March 21 to Hold from Buy; Deutsche Securities reiterated its Sell rating on March 26; Lehman Bros. revised its view on May 6 to Underweight from Equal Weight; and Ryan Beck maintained its Underperform rating on May 8, saying that "hyperventilated expectations" have bloated ADBE's valuation to premium levels.
Smith Barney, of course, has the reach to move a stock like ADBE but, frankly, it isn't breaking new ground with respect to its concerns about valuation. Nonetheless, in the absence of a blow-out earnings report after the close on Thursday, the growing list of firms expressing concern about valuation should slow the momentum of ADBE's stock.-- Patrick J. O'Hare, Briefing.com
11:26AM Motorola (MOT) 8.50 -0.39: Slower cellular handset sales in Asia caused Motorola (MOT) to revise guidance for 2Q03. MOT is now expecting its second quarter sales to be between $6.0 bln and $6.2 bln, versus its prior guidance of $6.4 bln to $6.6 bln. Earnings guidance was also lowered, as the Company now expects a breakeven quarter, compared to previous guidance of $0.03 to $0.05 of EPS.
The reason for the shortfall in sales was blamed on the effects of SARS, an issue which has seen little press in the last few weeks, but had enough of an impact in the first few weeks of the quarter to cause management to alter guidance. An earthquake in Sendai, Japan, (measured at 7.0 on the Richter scale) also proved to be a factor in lowering guidance. The earthquake temporarily disrupted manufacturing operations and will result in repair and clean up costs in the second quarter. This will only affect earnings and not sales in the quarter. On the call, management noted that business was tracking "as expected" throughout the rest of the world, which somewhat quelled fears that this reduction in sales had some other origin rather than SARS.
Inventory issues were also a point of concern as local Asian distributors had increased inventories due to weaker sales. The Company reported that it has 20 mln handsets in inventory and is looking to lower inventory in the coming weeks. This gave many analysts fears that ASPs will be driven down sharply in order to bring the inventory levels into a respectable range.
MOT stated that it expects to gain Asia market share in the calendar year, and pointed to the launch of 2 new GSM products in 2Q03, 8 launches in 3Q03, and 9 planned launches in 4Q03. The added investment in local, in-country design and engineering also helped management justify its idea of market share growth.
Sell through rates are struggling in Asia, as the Company noted that sales were down 20% from what it had expected. China was even worse, showing a 30% drop in demand. The Company also noted that there was increased competition in cellular handset sales in Asia.
A further breakdown of the problem shows that of the $400 mln decrease in revenue (from old midpoint to new midpoint) one third is from the semiconductor division and two thirds is from its PCS (personal cellular segment). This implies that each unit could experience as much as an 11% decrease in sales from the previous quarter. The other business units, which accounted for accounted for 44% of sales in the previous quarter are expected to be flat to higher in the coming quarter. Operating margins, which are expected to see decreases in both the PCS and SPS (semiconductor products segment), are likely to be flat to higher across the other 4 operating units.
During the call, management went very quickly through a presentation that noted that the slowdown would be industry wide, and cause lower sell through throughout Asia. This will adversely impact inventory levels, ASPs and adoption rates of new products. Further, that same slide noted the company sees SARS possibly effecting 4Q03. This is a little hard for us to understand, seeing as travel bans have been lifted to many Asian countries and relatively few new cases have been reported.
Overall, analysts were on the low end of previous guidance, so the reduction in guidance didn't really hurt too much. Down only 4% after this bad news really isn't too bad, but that doesn't make this stock a buy. It still trades at a lofty 19x next year's earnings and has a lot of uncertainty surrounding it. Management even noted that while world markets were showing signs of stability, a recovery has been postponed. Given this cautious outlook and high valuation, Briefing.com does not suggest new money be invested in MOT (For added perspective on earnings pre-announcements, be sure to read today's Stock Brief). --Brian Bolan, Briefing.com
1:47PM Punk Ziegel downgrades QLGC, BRCD, MCDT, ELX : Punk Ziegel downgrades select enterprise storage stocks, saying valuation has gotten too far ahead of growth. Firm downgrades QLGC to Sell from Mkt Perform, saying it is the most expensive in the group at 7x sales; target is $37. Firm downgrades BRCD to Sell from Mkt Perform, as firm thinks the stock should trade at 2x sales, not 2.7x; target is $4.75. Firm downgrades MCDT to Mkt Perform from Buy and cuts price target to $13 from $15, citing valuation. And firm downgrades ELX to Mkt Perform from Buy and cuts their target to $24 from $28, saying a multiple of 25x forward earnings is reasonable.
9:55AM ChipPAC target raised to $10 at Needham (CHPC) 6.86 -0.20: Firm reiterates its Buy rating and raises price target to $10 (from $7) based on view that revs, EBITDA and EPS should meet or exceed consensus estimates over the next 18 months, financial position has been materially strengthened, and valuation.
9:30AM Cymer downgraded at Moors & Cabot (CYMI) 34.24 -0.27: Moors & Cabot downgrades to Sector Perform from Sector Outperform based on valuation, as the stock has almost reached their $36 target; also, the co's mid-qtr update is likely to be cautious, and checks indicate that litho suppliers are not showing any pickup in demand.
9:21AM Nasdaq technical levels : -- Technical -- From current levels, look for initial support in the vicinity of 1619 to 1621, followed closely by additional support at 1614. To the upside, look for initial resistance at 1630 to 1632, followed by additional overhead at 1638.
8:38AM Axcelis Tech reaffirms Q2, appoints new interim CFO (ACLS) 6.60: Company reaffirms Q2 EPS loss of $0.10-0.12, vs Reuters Research consensus of ($0.10), and revs of $120-130 mln vs estimate of $81.8 mln. Co also appoints Stephen G. Bassett as interim CFO following departure of Neil Moses.
8:33AM Photronics downgraded at First Albany (PLAB) 17.40: First Albany downgrades to Neutral from Buy based on valuation, as they think the shares are fairly valued at 20.7x their FY04 est, 3.3x tangible book, and 1.6x FY03 sales; also, firm is concerned about the co's mix going forward and wants to see high-end demand accelerate before becoming more constructive; target is $17.
8:29AM Adaptec downgraded at First Albany (ADPT) 8.31: First Albany downgrades to Neutral from Buy based on valuation, as the stock is near their $8.72 price target.
8:13AM Freddie Mac terminates Pres/COO, announces CFO resignation (FRE) 59.87: Co announces the resignation of Pres/CFO Vaughn Clarke and termination of former Pres/COO David Glenn. Mr. Glenn was terminated because of serious questions as to the timeliness and completeness of his cooperation and candor with the Board's Audit Committee counsel, retained in January 2003 to review the facts and circumstances surrounding the principal accounting errors identified during the restatement process. The corporation has informed its regulator OFHEO, the SEC and the NYSE about the matters described in this release. FRE also announced the retirement of its CEO/Chairman.
finance.yahoo.com |
