Clint,
Two candidates for the short side.
Harry
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APPLIED MATERIALS INC. (AMAT) 39 3/8 +1 7/16. Shares of semiconductor wafer
equipment manufacturer are performing rather well today, considering that the outlook remains
rather cloudy. While the company managed to match Wall Street expectations with its Q2 results
last night, it cautioned that circumstances in Asia are not particularly good and does not expect
any major turn around in capital spending conditions anytime soon as the semiconductor sector
continues to be hampered by an oversupply in the DRAM market. Revenues in the period rose 31%
from a year-ago to $1.176 billion, but fell 10% sequentially. Likewise, gross margins from a
year-ago improved to 47.1% from 46%, but fell sequentially from Q1 level of 48.1% of total
sales. The numbers are certainly in keeping with the turmoil in the semiconductor sector and the
best one could have hoped for considering the reduced spending schedules for the sector. And
while the outlook for a continuation of the spending trend is not too surprising, what has helped the
stock today is the fact that Wall Street has remained supportive. For the most, Wall Street
continues to view the stock favorably, shaving earnings estimates for the next couple of fiscal years,
in keeping with the guidance the company provided, yet maintaining positive views about the stock
going forward. In fact, most Wall Street firms are positive that a turnaround in the semiconductor
sector will occur sooner rather than later and are continuing to recommend the stock. Only BA
Robertson Stephens has downgraded AMAT, and they went from a "strong buy" to a "buy."
Considering the slowing business activity in the US and Taiwanese markets, the way Wall Street has
lined up behind the stock must be considered a major win for the stock.
Chart
14:10 ET ******
DAYTRADER: The stock is up $%@k3*g 209%, on some @#%%s@#t Internet set-top box
announcement: It's gotta' be a short!. You can be sure that's what some traders were saying about
C-Phone (CFON 8 11/16 +5 7/8) shares this morning when it was up 50%, up 90%, and up
165%. But even with your ordinary Internet-related one-day superstar, the safest approach to
shorting the stock is to wait until the day after the initial pop in price has occurred. The last thing you
want to do is get in front of a moving train, particularly if you have never traded that particular stock
before. Once CFON shares rose the first 50% and held, a warning signal should have gone off in
your head. Yea, a month ago, small-cap "Internet" stocks were being launched for triple-digit gains
by daytraders, but that euphoria has begun to fade. Moreover, CFON's set-top box news was
barely worthy of mention. Of course, these are some of the very reasons that some daytraders have
no doubt used to justify shorting the stock at much lower levels today. But, before you ever short a
fast-moving stock, you should first look at the price chart. CFON's chart reveals that the stock
spiked up in price late last year, going on to more than double in price. A little research would have
also revealed that for awhile, CFON was a big-momentum stock -- the type of play that
short-sellers would expect to crumble once momentum players moved on to the next hot concept
(e.g. oilfield drilling/services, help-desk software stocks, cancer-related biotechs). A quick look at
CFON's fundamental information (as supplied by recent momentum name MarketGuide), would
have revealed that CFON sports an extremely high short-interest ratio of 7 days (for explanation of
short-interest ratio, see earlier CFON piece). Once seeing that the stock has such a high S/I ratio,
the first thing you should think is to beware of the short-covering rally, which is fueled by the stock
taking out stop orders placed by long-term shorts and by new shorts covering their positions as the
stock moves higher throughout the day. Okay, now that you know why a stock such as CFON is
capable of making such a seemingly absurd move, the next question is how to play it. While this
stock is likely to begin heading south again by mid-morning tomorrow, potential short players should
be aware that the downside is probably not as great as you might expect. Because today's rally is
largely fueled by short-covering, there will not be as much profit-taking once the stock begins to
retreat. Why? Because the people who are covering their short positions are simply replacing the
shares that they borrowed earlier. So unless the original holders of the shares or insiders begin to
dump the stock, the downward move is not likely to be as profitable near-term as most would
imagine. If you do decide to short this stock (which we are not recommending), be careful of the
next short-covering rally which is likely to occur about two days after the stock begins to crack. |
