I posted this on the Motley Fool Board and thought some here might like to read it as well.
This is my first time posting in the 3Com folder but I thought some of you might like my perspective on buying 3Com. I'm going to look briefly at the Fundamental side of this equation since it's obvious most here have beat this horse to death. Everyone knows that 3Com believes that its biggest problems are behind them and understands the discount at which 3Com is trading in relation to other companies in its industry and in relation to its own growth prospects (about 13 times 1999 earnings).
But this laggard has been falling for months now and why should anyone believe we've seen the bottom? This particular part of my answer comes from the stock's technical picture. Now I know most here are fundamental investors, but it can't possibly hurt to hear the "technical picture" on COMS, now can it? I can't tell you whether or not 3Coms' problems are behind them but I can tell you whether or not the Street believes 3Coms problems are behind them.
To start with, 3Coms has been in a severe downtrend since December of 1996 (like you all didn't know). If we connect the highs of December 96 with the highs of mid October 97 and mid April 98, we come up with a beautiful form of resistance, known to technicians as "a Downtrend line."
So what's that mean? Well many people's behaviors (notice I say people and not stocks) can be plotted and patterns can emerge in that behavior. For anyone who can't seem to get the picture of the lines I'm talking about, please email me and I'll be happy to supply you with one.
Essentially the stock has met resistance time and time again at the negative slope of this "downtrend line." However, currently the stock is approaching it with more strength. A "buy" signal would be given with a close above the Downtrend line (currently around 31). So why do I believe there is strength?
This basis comes from a bit more of the technical applications. Many indicators that technicians use are showing strength in 3Com for the first time since December 96. For example, the On Balance Volume indicator which compares the volume of "up" days vs. the volume of "down days" is beginning to make a series of higher bottoms and higher tops. Prior to now, it had been making a series of lower bottoms and lower tops. One bullish sign.
The second indicator one can look at is the relative strength index which is also making a series of higher bottoms and higher highs. This indicator compares the stock's own strength to itself. Two Bullish Signs.
A third indicator is the MACD and its meaning is one of the most complicated of all. But to simplify, this indicator currently shows that bears lost weakness on this most recent fall and that the Bulls are currently ready to take control (I have graphs to clarify all these points). Three Bullish Signs.
So the strongest signal for this stock would be given when it breaks above its downtrend line and its 200 DMA which also has proven to be tough resistance. Given the strength of the indicators I'm using, I believe COMS has seen its bottom and is about to turn up. This week should mark the beginning of the first close above this 2 year old resistance line. Good Luck.
Conservatively Yours,
Raymond J. Norris |
