Qualcomm Back Draft:
Traders Bet on Look-Alikes
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
Here come the Qualcomm tag-alongs.
During the past several weeks, day traders have been scanning the
message boards and stock Web sites looking for wireless technology
stocks that could benefit from Wall Street's torrid love affair with
Qualcomm. After getting battered for much of last week, the
telecommunications darling was up $9.9375 to $150 at 4 p.m. Friday on
the Nasdaq Stock Market.
So, where have day traders turned their sights? Interdigital
Communications, which nearly quadrupled between Dec. 28 and Dec. 30
when it hit $82. Sawtek, another favorite Qualcomm wanna-be of day
traders, has jumped from $41.25 Dec. 1 to $62.3125 on the Nasdaq,
although it is down from its high of $73.75 a week ago.
It isn't the first time day traders have tried to take advantage of the back
draft of a stock that has caught fire. Who can forget the craze to own Linux
stocks after the hypersuccessful initial public offerings of Red Hat,
Andover.Net and VA Linux Systems? Those IPOs caused a rush by day
traders into smaller, less well-known stocks viewed as Linux plays,
including Corel, Perle Systems, Track Data, BitWise Designs and
Bitstream.
Then there was the scramble to own Pokemon stocks. This sent 4 Kids
Entertainment, the initial big Pokemon play, into orbit as it rocketed to
more than $90 in November from $30 at the end of September. The rush
touched off a short-lived spike generated by day traders in Grand Toys,
which jumped to $30 from $7 within days in late summer.
Through it all has been a role reversal taking shape at times between big
investors and day traders. Not long ago, institutional investors uniformly
scoffed at the stocks being chased by day traders. These days, however,
they increasingly are likely to jump on board a stock being favored by
these frenetic individual investors rather than risk being left behind on
another Internet stock's rapid ascent. They aren't waiting for stocks to
become an Amazon.com or a Yahoo! before they begin to nibble.
Is the tail wagging the dog? "There is no question in the current
environment day traders are having a significant impact in day-to-day price
movements. To the extent that there is some room for hedge funds to
follow along in that, why not?" says Henry Blodget, Merrill Lynch's Internet
analyst.
It is all part of the trend among big investors to join the "momentum" party.
The development also shows how profoundly the growing legion of day
traders is influencing behavior in the broader market.
The stock of one Qualcomm tag-along, Conductus, exploded last week.
The Sunnyvale, Calif., maker of superconductors that improve the
performance of wireless networks reached a high of $13 from around $7
Dec. 22 after it put out a news release announcing it had received $15
million in equity financing from several venture-capital firms.
"We've been on the phone with investors the last few weeks a lot," says
Ron Wilderrink, chief financial officer of Conductus. That is quite a change
from one year ago, he says. "Our stock wasn't on anyone's radar while we
were in the $2 to $3 range," he says.
Then there is tiny Illinois Superconductor, which, similar to Conductus,
makes superconductors used for filtering purposes on wireless networks. It
is also a favorite on the message boards but has drawn an early investment
from Elliott Associates, a New York hedge fund. Says Mark Brodsky,
portfolio manager at Elliott: "We expect this technology to be important to
the wireless upgrade in Japan and for solving capacity limitations in wireless
communications."
Some specialists say day traders' role as scouts when it comes to finding
new Internet-stock plays may be beneficial. "Net net, it helps the market's
efficiency," says Michael Mauboussin, strategist with Credit Suisse First
Boston. "As a result of television and chat rooms, the way information is
being shared is unprecedented," he says. "So when there is a ripple there
are a lot of tools investors can now use to determine who might benefit."
That isn't to say it is a safe bet to pounce on every penny stock, or small
technology stock being chased by day traders. Far from it. Grand Toys,
for instance, the tertiary Pokemon stock being touted by day traders, had a
dramatic run-up followed by an equally dramatic plunge, leaving it right
back where it began its big climb last summer. Corel, the Linux play, had a
similar round trip, rising to a high of $44.50 from about $15 at the end of
November. At 4 p.m. Friday on the Nasdaq, it was at $19.3125.
"The market will eventually sort out where the value is," Mr. Mauboussin
says. "But, very often there is some logic to these things." Corel, while
giving back much of the gains it made during its climb, is still way up from
where it began last year, at around $2. The Pokemon play 4 Kids is also
up significantly from where it started 1999, at around $2. At 4 p.m. Friday
on the Nasdaq, it was at $25.75.
In the case of the Qualcomm tagalongs, day traders might be on to
something, some analysts say. "What's happening is people are realizing
that wireless is going to be much bigger than anyone expected. Qualcomm
is getting much of the reward right now. But there are many participants in
that space," says Marc Cabi, who follows Qualcomm at Credit Suisse First
Boston.
Of course, it didn't hurt that Walter Piecyk, a PaineWebber Group analyst,
sent the stock soaring late last year, after initiating coverage by setting a
12-month price target of $1,000 (now $250, after a 4-1 stock split).
A few big changes in the wireless market also helped ignite Qualcomm. It
helped last year when wireless operators began showing
better-than-expected results, including Sprint (PCS Group) and SBC
Corp., the parent of Southwestern Bell. Also, Qualcomm in March said it
had settled a long-running patent dispute with Telefon AB L.M. Ericsson,
also agreeing as part of the settlement to sell its infrastructure business to
Ericsson, which had been a drag on Qualcomm's earnings. Wall Street
cheered the news because it not only promised to help Qualcomm's results,
but also cleared the decks for further proliferation of its technology, called
code-division multiple access, or CDMA. The timing couldn't have been
better, either. At the same time, CDMA technology was being used by
more wireless operators in the U.S, Japan was getting set to begin installing
equipment this year for what is called "third generation" CDMA. The
technology will make possible faster and more sophisticated
communications such as surfing the Net and sending e-mail via handheld
devices.
That is where the day traders' picks come in. Companies such as
Conductus and Illinois Superconductor make superconductors that help
filter out signals that otherwise degrade the quality of CDMA
transmissions. The filtering process is especially crucial, however, when it
comes to the third-generation technology that will begin to be deployed this
year in Japan. Interdigital, which also has attracted some large block
buying from institutions, holds patents for next-generation communications
and data-transfer technology for which it receives license fees and
royalties. Sawtek makes electronic signal-processing parts related to
third-generation wireless technology.
"Sometimes the day traders pick up on things," Elliott's Mr. Brodsky says.
"This may be a situation where the day traders are a step ahead."
Write to Susan Pulliam at susan.pulliam@wsj.com |
