8:00pm (EST)

1.  Market Summary

2.  Watching Western Digital (WDC)        

3.  Atmel (ATML) – A Quick Peak   

4.  Earnings  

5.  Weekly Wrap Portfolio Update  

6.  Week Ahead

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1. Market Summary

The bulls had another good week as they have started 2011 off with back-to-back weekly wins.  Of course, the market has been in rally mood since mid-September and last week was the official start of 4Q earnings season and year-end results for a lot companies.  We covered a number of earnings announcements in our Daily newsletter and most of them came in pretty good which provided enough momentum to push the market to new heights. 

The Dow jumped 55 points on Friday to finish at 11,787.  For the week, the index added 112 points, or 1%, as the bulls ran their winning streak to seven straight.  After battling the 11,600-11,700 area for 3 weeks, the Dow made a solid break above 11,700 on Wednesday and closed above this level for the rest of the week.  We said back in October that Dow 12,000 was a strong possibility and the index hit an intra-day high of 11,794 on Friday.  On January 6, the index touched 11,795.  This could be a problem as it represents a “short-term” double top so we are now also watching support at 11,550-11,500.

The S&P 500 added nearly 10 points on Friday to close at 1,293 and gained 22 points, or 1.7%, for the week as the bulls made it 6 in-a-row.  We mentioned if the index could break out of the 1,250-1,260 range there would be a run up to 1,275 and from there we could test 1,300.  There could be a push up to 1,325 and the index went out on its highs but our feeling is we may test 1,250-1,260 again before breaking our target.

The Nasdaq made it 2 in-a-row, as it gained 20 points on Friday and settled at 2,755.  For the week, the index surged 52 points, or 1.9%, and made a fresh 3-year high in the process.  We have been calling for Nasdaq 3,000 for months and the index will have trouble with the 2,850 level but we may be taking a breather.

In our Daily Newsletter, here is what we said just last Thursday before the opening bell:

“As many of our long-time subscribers know, we are usually lights-out when calling market direction, even when we were in a trading range for 5 months in 2010, and as we approach these targets we will have to figure out our next move(s).

As you can see, the major indexes are right near our targets we have been calling for since October and if, or once we get there, the market might get a pullback.

Now, next week will be January option expiration and over the last decade it hasn’t been too bullish.  In fact, the 3rd Friday of January option expiration week has been brutal with losses of up to 2% on a few occasions.

In a perfect world, the market moves higher through the rest of this week and on Tuesday which is normally an up day after MLK.  The market is closed on Monday for the holiday so we are looking for the aforementioned price targets (12,000; 1,300, and 3,000) to be hit by next Tuesday or Wednesday.

We doubt Tech gets to 3,000 but we should get close.  After that, the market gets a slight pullback which will be where it gets interesting.” (END)

Well, the market was closed today and Apple (AAPL, $348.48, up $2.80) announced some major news.  The company’s CEO, Steve Jobs, has decided to take another medical leave of absence, his third, and the news comes just a day before Apple is scheduled to release earnings.  He will still maintain his CEO title.

Of course, the natural reaction is always one of panic for investors and Wall Street but Apple’s stock has historically done well during his leave and has gone on to make news highs over the years upon his return.  However, there will be a lot of volatility this time around and it will be interesting to see how much this impacts the share price on Tuesday morning when the U.S. markets open.

In overseas trading, Apple shares were down 6% in Frankfurt and some of the talking heads are already factoring in a 10% decline.  This would mean a $35 haircut and a test near $310.  If shares do test $300-$310 we would expect buyers to come in at support levels but if things are worse-than-expected with Apple’s main man, shares could suffer.

Perhaps a blowout quarter by Apple would ease fears and there is a good chance they smash earnings on the strength of iPad sales and a strong holiday season.  In any event, we think there is a good chance for a strangle option trade but the option premiums will be juiced so we may have to sit on the sidelines.  There may also be an opportunity to use some call options on a rebound or put options on a break below support.  We will be covering this story further in the morning with our Daily newsletter but the market is poised for a big move one way or the other over the next few days. 

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2.  Watching Western Digital (WDC)

Western Digital (WDC, $33.44, up $0.69) reports earnings on Tuesday, January 18, after the bell.  Expect good news, despite analysts’ estimates that it will earn $0.59 on revenue of $2.36 billion, down from $1.85 on revenue of $2.62 billion a year ago. 

A conference call will be held at 3:00 PM Pacific/6:00 PM Eastern time at http://www.wdc.com/en/company/investor/confcall.aspx.  For a telephone replay, investors can dial 888-568-0891 (toll free) or +1-402-998-1567 (international).

Sentiment is for a 68% drop in earnings and a 10% drop in revenue from a year ago.  The company, along with competitor Seagate Technology (STX, $14.26, up $0.17), makes hard disk drives (HHDs) and control about 60% of the world market share.  Both companies have been losing the battle to solid state drives (SSDs), which typically use Flash. 

Analysts also expect a 68% drop in earnings and a 10% drop in revenue from a year ago for Seagate, which reports the next day after the bell.  This percentage drops are in- line with estimates for Western Digital.  The good news is that the bad news has already been factored into the stock price, so any surprise could cause the stock price to jump.  Plus, not only will WDC’s earnings preview STX’s earnings, but WDC may get an additional boost if both companies report good numbers.

It was not long ago that WDC and another suitor bid to buy STX, the world’s largest maker of HHDs.  There was some noise that WDC was willing to offer as much as 10%-50% more than a competing takeover proposal from TPG Capital, which had already put more than $7.5 billion on the table for Seagate. 

TPG’s bid itself was significantly higher than STX’s market cap.  Certainly they saw value in the company and the industry.  Plus, WDC is only a $7.7 billion company.  It must be confident that it can pay an additional 10%-50% of $7.5 billion for STX.  The size WDC offered is larger than its own size.  Maybe they think they are undervalued.

Although HHDs may eventually get replaced by SSDs, that won’t happen for at least several years.  SSDs are primarily used in small devices such as the iPhone, iPod, and iPad.  The Macbook Air is currently one of the few laptops using SSDs.  Other laptops and desktops still use HHDs.  Price for HHDs is still cheaper than SSDs of the equivalent memory and storage.  And that will stay that way for some time with prices for both dropping.  Storage demand is expected to stay strong with the increasing need for servers to store all the content being shared or steamed over the internet.  PC demand is also expected to grow, too.

As for WDC, its HHDs are used in desktop computers, notebook computers, enterprise storage products, servers, workstations, video surveillance equipment, networking products, digital video recorders, satellite and cable set-top boxes, and external storage appliances.  It also offers hard drives as stand-alone storage products for personal data backup.  The iMac uses its HHD.  And Mac sales are projected to double.  The company also makes SSDs.

The company is expanding rapidly in Asia, which contributed 53% of their revenue in the four quarters ending with the first-quarter FY2011, compared to 33% for the same time period in FY2008.  Asia will provide significant growth for the company in the future.

Thus, despite the challenges it faces, the company, which boosts a strong balance sheet and excellent management, expects earnings to be bright.  After all, WDC did manage to grow revenues by a compounded annual rate of 22% over the last five years.  And 2Q sales include the holiday season, which are often rosy. 

The chart below shows data provided from their earning press releases with earnings estimates placed for 2Q of FY2011:

Revenue – Quarterly Results (in $Billions)

Earnings Per Share – Quarterly Results


2011

2010

2009


2011

2010

2009

1st Qrt

2.396

2.208

2.109

1st Qrt

$0.84

$1.25

$0.93

2nd Qrt

2.360

2.619

1.823

2nd Qrt

$0.59

$1.85

$0.06

3rd Qrt

2.641

1.592

3rd Qrt

$1.71

$0.22

4th Qrt

2.382

1.928

4th Qrt

$1.13

$0.86

The chart below shows calculations for the growth from prior quarters with earnings estimates placed for 2Q of FY2011:

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results 


2011

2010

2009

 

2011

2010

2009

1st to 2nd

-36

411

-286

1st to 2nd

-0.25

0.60

-0.87

2nd to 3rd

22

-231

2nd to 3rd

-0.14

0.16

3rd to 4th

-259

336

3rd to 4th

-0.58

0.64

Starting in the 2Qof FY2010, both earnings and revenue started declining each quarter.  The exception is that revenue increased from 4Q FY2010 to 1QFY2011.  And since revenue jumped from 1Q to 2Q in FY2010 and considering the statements made at the beginning of the article, the odds are that it will jump again.  Thus, the revenue estimate seems too low.  The same can be said about the earnings estimate, though earnings did decline from 4Q FY2010 to 1Q FY2011.

The chart below shows calculations for the growth from prior years with earnings estimates placed for the 2nd quarter of FY2011:

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results


2010 to 2011

2009 to 2010

 

2010 to 2011

2009 to 2010

1st Qrt

188 (8.5%)

99 (4.6%)

1st Qrt

-0.41 (-33%)

0.32 (34%)

2nd Qrt

-259 (-9.9%)

796 (43.7%)

2nd Qrt

-1.26 (-68%)

1.79 (2983%)

3rd Qrt

1049 (65.9%)

3rd Qrt

1.49 (677%)

4th Qrt

454 (23.5%)

4th Qrt

0.27 (31%)

In every quarter, revenue increased from the previous year except for the estimate for 2Q FY2011.  That doesn’t seem likely, especially considering that the percentage increase of FY2010 to FY2011 grew from that of FY2009 to FY2010 in the first-quarter.  It will be unusual for 2Q to see a 53.6% decline from FY2009 to FY2010 to FY2010 to FY2011.  As for the earnings, the decline is even greater, at some 3000%.

The technicals also show that a strong move upward may be developing.

The MFI seems to be bouncing off its base line and positioning itself to move higher.  The W%R also gives a bullish signal, giving extra confidence that the stock will move higher.

WDC looks undervalued and might be a “Buy” at current levels but earnings are tricky and Apple’s news could weigh on Tech this week.

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3.  Atmel (ATML) – A Quick Peak

There have been a lot of buzz surrounding Atmel Corporation (ATML, $13.91, up $0.12) in the news.

–  In December it was chosen by Sharp to power the SH8128U smartphone using its maXTouch” mXT224 touch controller.

–  On January 6, the company announced a partnership with Bang & Olufsen ICEpower to build an end-to-end audio platform for premium-quality audio playback.

–  On January 7, they received ZigBee Certified status for the Atmel Key Remote Controller, allowing it to be compatible with most ZigBee standards.

–  On January 13, it was selected by readers to win the 2010 Top Product Awards for its 32-bit AVR® microcontroller AT32UC3L in the Application of Electronic Technique (AET), a widely recognized electronics/IT magazine in China.

These news plus Intel’s blowout earnings all paint a rosy picture for the stock.  As the leader in touch technologies, the company should do well with the sales of iPads, tablets, and touch phones flying off shelves.  But the technicals and fundamentals show that although the stock may have more room to run, investors should be cautious.

The company is not cheap when compared to its top competitors and the industry.

 

Trailing

PE1

Forward PE1

 

PEG1

Gross Margin1

Operating Margin1

Price / Sales1

Return on Equity2

Price / Book1

ATML

54.12

21.40

1.17

41.09%

9.27%

4.13

13.94

7.51

CY

55.43

18.88

1.61

54.23%

9.35%

4.14

10.56

4.97

IDTI

47.12

12.07

0.79

54.25%

12.04%

1.74

4.02

1.80

LSI

34.75

12.44

0.87

42.87%

3.82%

1.48

8.51

2.74

MCHP

20.83

15.49

1.31

57.30%

29.49%

5.31

20.30

4.11

NXPI

40.74%

7.93%

1.23

-63.72

5.39

STM

19.47

13.72

1.34

38.06%

4.31%

1.04

7.39

1.42

TXN

14.38

13.35

1.34

53.63%

31.26%

2.92

29.99

3.95

Industry

15.56

0.50

41.76%

12.30%

1.47

Source:

1.  Yahoo Finance

2.  MSN Money

Its trailing PE is near the highest.  Its forward PE, price/sales, and price/book are the highest.

The stochastic oscillator gave a bearish cross, but the MACD gave a buy signal about the same time.  And although the price is on the upper Bollinger Band, a possible sell signal, the MFI just toughed overbought territory before reversing.  So for now, it looks like the stock is not in danger of falling, but you should continue to monitor the price signals.  It looks like a reversal could be near, but it is too early to call the move.

Shares were trading in the $5-$6 back in August and have more than doubled in since then.  The all-time high is just north of $25 which was set back in the dot.com bubble of March 2000.  If shares can clear $15 over the short-term then there is a chance for a run to the upper-teens and we would have a tight stop of $12 on it if you are interested in “trading” this name.

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4.  Earnings

The companies in BOLD, we are looking at as possible trades and we may list call and put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week.  (Quotes as of Friday’s close 1/14/11)

MONDAY: Market Closed.

TUESDAYApple (AAPL, $348.48, up $2.80), Charles Schwab (SCHW, $18.83, up $0.28), Citigroup (C, $5.13, up $0.09), Fastenal (FAST, $59.89, up $1.08), Forest Laboratories (FRX, $31.44, down $0.12), International Business Machines (IBM, $150.00, up $1.18), TD Ameritrade Holding (AMTD, $20.65, down $0.24) and Western Digital (WDC, $33.44, up $0.69).     

WEDNESDAYeBay (EBAY, $29.18, up $0.47), F5 Networks (FFIV, $144.17, up $0.22), Goldman Sachs (GS, $175.00, up $3.43), Seagate Technology (STX, 14.26, up $0.17), SLM (SLM, $14.28, up $0.19), U.S. Bancorp (USB, $27.37, up $0.62), Wells Fargo (WFC, $32.75, up $0.86) and Xilinx (XLNX, $31.69, up $0.80).

THURSDAY:  Advanced Micro Devices (AMD, $8.20, down $0.06), Emulex (ELX, $12.63, down $0.10), Fairchild Semiconductor International (FCS, $17.02, up $0.26), Flextronics (FLEX, $8.39, up $0.09), Freeport-McMoRan Copper & Gold (FCX, $118.35, up $0.28), Google (GOOG, $624.18, up $7.49), Intuitive Surgical (ISRG, $288.28, up $9.17), Johnson Controls (JCI, $40.45, up $0.24), Morgan Stanley (MS, $28.98, up $0.68), PNC Financial Services Group (PNC, $64.22, up $3.09), Polycom (PLCM, $41.81, up $0.44), Skyworks Solutions (SWKS, $32.51, up $0.71), and Union Pacific (UNP, $98.66, down $0.36).   

FRIDAY:  Airgas (ARG, $63.72, up $0.25), BB&T (BBT, $27.78, up $0.91), General Electric (GE, $18.82, up $0.22) and Schlumberger (SLB, $86.91, up $2.31).     

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5.  Weekly Wrap Portfolio Update (Closing prices as of 1/14/11)     

DryShips (DRYS, $5.41, down $0.04)

January 2012 7.50 call (DRYS120121C00007500, $0.63, down $0.02)    

Entry Price:  $5.25 (1/03/11) sold January 2012 7.50 call @ $0.65

Exit Target: $8

Return: 18%

Stop Target: None

Action:  DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The options opened at 69 cents so you should have gotten 65-70 cents for selling them.  This lowered the cost basis to $4.60.

If shares are over $7.50 a year from now, you would be “called away” and the trade would make nearly 70%.  We like the risk/reward factor with this trade.

 

Seattle Genetics (SGEN, $17.15, down $0.08)

March 17.50 calls (SGEN110319C00017500, $1.30, down $0.10)

Entry Price:  $15.50 (12/27/10) sold March 17.50 calls @ $0.90

Exit Target: $20

Return: 20%

Stop Target: None

Action:  For those of you just joining us, we did a big write-up on this company back around Christmas which you can read in our archives.  We are also in this trade for our Daily newsletter and shares made a big move this week after their company presentation and the CEO hitting the airwaves.

Seattle Genetics opened at $15.80 and shares were at $15.50 at 10am on 12/27/10.  The March 17.50 call option could have been sold for 90 cents.  This lowered the cost basis to $14.60.  Continue to hold.  


Patriot Coal (PCX, $24.52, down $1.96) (COVERED CALL)

January 19 call (PCX110122C00019000, $5.50, down $1.80)      

Entry Price:  $17.80 (12/6/10) sold January 19 call @ $0.95

Exit Target: $20

Return: 46%

Stop Target: None

Action:  Patriot Coal hit a high of $27.35 on Thursday and fell over 7% on Friday.  The January options expire Friday and we will still likely be called away. 

Patriot Coal opened at $17.51 and shares were at $17.80 around 10am on 12/6/10.  The January 19 call could have been sold for 95 cents.  This lowered the cost basis to $16.85. 

If shares are “called” away this week (which is likely the deal) the trade will make 13%.   

If shares don’t and fall back below $19, we will sell another option to lower our cost basis.


Dendreon (DNDN, $37.16, up $0.56) (COVERED CALL)

February 39 call (DNDN110219C00039000, $1.15, up $0.20)

Entry Price:  $41.96 (9/13/10) sold October 45 call @ $1.30, (11/11/10) sold December call @$1.75, (12/20/10) sold February 39 call @ $1.50

Exit Target: $45

Return: -1%

Stop Target: None

Action:  Dendreon opened at $41.96 and you could have sold the October 45 call option for $1.30 on 9/13/10.  This lowered the cost basis to $40.66.

On 11/11/10 we sold the December 40 call option for $1.75 which lowered our cost basis to $38.91.

On 12/20/10 we sold the February 39 call option for $1.50 which lowered our cost basis to $37.41.

If the stock gets “called away” from us by mid-February the trade will return 5% from when we first profiled it.

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6.  Week Ahead

We mentioned in our Market Summary that this week could be volatile and there a number of big-name companies reporting earnings which could be good or bad.  If the market gets more blowout earnings, then there is a chance Apple rebounds, especially if they smash estimates.  If earnings come in weaker then the bears might make some noise.

As far as economic news, on Tuesday, the Federal Reserve will publish its Empire State manufacturing Survey for January, and the National Association of Home Builders will give an update on the housing market index.

On Wednesday, the Commerce Department will report December housing starts and building permits while President Obama welcomes the China President, Hu Jintao, who is making fresh comments on the Dollar.

For Thursday, the market will get a peak at Weekly Jobless Claims and an update on existing home sales.  Friday will be light but General Electric will announce earnings before the bell.

All-in-all in should be an interesting week with lots of action.