Devi, Don't feel bad about buying 1000 shares of DIGI at a higher price. Almost everybody who has bought the stock in the past year is in at a loss. But I firmly believe that the stock is basing and will be higher by the end of the quarter and much, much higher next year. If you plan to hold the stock for a while, I highly recommend that you average down as long as you are still diversified in other holdings or have extra cash. The key is don't put too much of your capital in one stock in case things don't work out the way you planned. Here are the reasons that I'm bullish on DIGI:
1.) Analysts have cut DIGI's fourth quarter earnings estimate to just 14 cents. I think this is way too low and was done because they were thrown for a loop when DIGI released third quarter earnings of 1 cent. Analysts would rather be too low than too high and I think they overshot this one. In fact, they raised the estimate from 13 cents to 14 cents last week because they realized their estimates were too low.
2.) All the telco equipment providers, DIGI and TLAB for example, report their strongest revenues and earnings of the year in the fourth quarter.
3.) DSC has many new products, one of which is called an Internet Cutter. I'm sure you've been reading about the problem the RBOCs are having with their switching circuits because of the explosive use of the Internet. The number of switches they have is based on historical calling patterns, but people accessing the Internet are staying connected for hours and hours--much longer than normal telephone calls. This is putting a crimp on the local phone system to the point where some people get a fast busy when they try to place a call. The Internet Cutter product solves this problem by automatically bypassing the RBOCs switch network when a call is being connected to the Internet. This product could generate a significant amount of revenue for DSC. And since it includes software, I am speculating that it is also a high margin product which will add a lot to the bottom line. Another area in which DSC seems to be a leader is fiber to the curb. By installing fiber optic wires to customer's homes, RBOCs can offer new services like home banking, interactive games, and movies on demand. The deregulation of the telecommunications market is going to bring new competition to the RBOCs. In the next few years, it will be hard to differentiate between local telephone companies, long distance companies, and cable companies. In order to compete with services offered by these other companies, the RBOCs will have to offer new services and fiber to the curb allows them to do this. DIGI stands to make a lot of money by the deregulation of the telecommunications industry.
4.) DIGI's balance sheet is good shape. Their current ratio is 3 and their total debt to equity ratio is only 28%. In addition, the book value is $10 per share, $4 of which is in cash. The price to book is only 1.4 versus 9.6 for the industry. The company's valuation is cheap, but this is for a reason. Their earnings the past three quarters have been below expectations. But I am confident that this is temporary because management has acknowledged why the earnings are down and have vowed to get them growing again. DIGI's five year earnings growth rate is about 28%. Given the growth in the telecommunications industry and my previous comments about their new products, I expect DIGI to keep growing at their historic rates.
5.) My technical analysis work indicates that DIGI is basing after making its low at 12 5/8. The daily chart has support at 13 1/2 with resistance at 15 1/4 and 18 1/2. On Nov 11, the RSI reached the over-bought level of 71, but it has now corrected to 55. The weekly chart has support near the close today. The weekly stochastic is positive as the %K crossed the %D the week of Oct 28. The %D is rising and is still at an over-sold level of 12. The montly chart is very over-sold with the stock trading outside the lower Bollinger Band.
My conclusion from both a fundamental and technical point of view is that one should buy DIGI. This isn't a daytrade though. Don't expect to get rich overnight. Patience is the key to making money in the market. Impatience and trying to get rich quick can put you in the poor-house real quick.
With reference to your questions about options:
Options have a strike price, an expiration date, and a cost (called the premium). The buyer of a call option has the right to buy a security at the strike price on the expiration date. The buyer of a put option has the right to sell a security at the strike price on the expiration date. In order to buy this right, the buyer pays a premium to the seller of the option. The premium has two components: intrinsic value and time value. The intrinsic value is how much the price of the security is above the strike price (for call options) and how much the price of the security is below the strike price (for put options). The time value is related to the number of days before the expiration date. Now lets look at some examples:
DIGI Dec 12 1/2 call: quote at close today is bid 1 7/8 ask 2 1/8
The strike price is 12 1/2, the expiration date is the third friday in December and the cost to buy the option is 2 1/8 per contract. Each option represents 100 shares of stock, so the cost is $212.50 each at the asking price. The intrinsic value is 1 3/8 because the stock closed at 13 7/8 today (13 7/8 - 12 1/2 = 1 3/8). This makes the time value 1/2 because the bid is 1 7/8 and the intrinsic value is 1 3/8 (1 7/8 - 1 3/8 = 1/2).
One of two things can happen on the expiration date:
1.) The stock finishes at or below the strike price. In this case the option will have a value of 0 because nobody will want to buy the stock at 12 1/2 if it is trading below that. Remember, a call option gives you the right to buy the stock at the strike price. But why would you want to exercise your right to buy the stock at 12 1/2 if it's trading below that in the open market.
2.) The stock finishes above the strike price. In this case, the option will have intrinsic value because you can buy the option gives you the right to buy the stock at 12 1/2, but it is trading higher than that in the open market.
You can sell an option any time before it expires; you don't have to wait until the expiration date to see if it has value. Let's say you buy the Dec 12 1/2 call at 2 1/8 and DIGI stock rallys to 15. The intrinsic value will be 2 1/2 and depending on when it gets to 15, the option will have some time value. Lets assume that the time value is 1/4, so the total value of the option s 2 1/2 + 1/4 = 2 3/4. You can sell the option and make a profit of the difference between your purchase price (2 1/8) and your selling price (2 3/4), or 5/8 of a point ($62.50 per option)
Beware that most buyers of options lose money. There are several reasons for this. One reason is the time value which erodes over time. Unless the stock moves enough to compensate for the erosion in the time value, you will lose money. If the stock finishes below the strike price for a call, or above the exercise price for a put, you will lose the entire amount of your investment because the option will be worthless.
I don't recommend that new investors trade options. It might be best to watch them for a while and see how the premium moves with relation to the underlying security.
Dan |
