The NASDAQ Market Analysis
So far in the month of June we have seen a continuation of May’s volatility storm. The month started with the market trading in a range between the February lows and the 200-day moving average and subsequently we have seen that range resolve to the upside. Additionally, the NASDAQ has pushed through the steep downtrend line that had constrained any rally since peaking out on April 26th. This give us several levels to trade against from the long side.
In this latest market down move that started in late April, the NASDAQ fared far better than the S&P 500 and/or Dow by remaining comfortably above the lows set in February 2010 and regaining the 200-day moving average earlier on in the bottoming process. Moreover, since the “Flash Crash”, the NASDAQ has yet to retest that intraday low, unlike the S&P and Dow, which both exceeded the extent of their May 6th declines. Since then, the NASDAQ has registered three successive higher lows on the daily chart paving the way for this index to once again lead the market’s next move higher.
In the bigger picture,the NASDAQ is the closest of the major indices to fully recouping the extent of their losses from the 2007 stock market peak to the 2009 low. Should the NASDAQ make new 52-week highs, we could be watching for this key index to breakout to new multi-decade highs in the not too distant future. That would be quite the development, and something which many could never have predicted during the dog days of 2007-2009.
This Week’s Focus Stocks
In my first set of selections, I want to focus on a few stocks that exhibited excellent relative strength during the market’s decline and one in which the damage done seems overly harsh.
Google (Nasdaq: GOOG)
Internet advertising is soaring these days and there’s no bigger player and beneficiary than Google when it comes to this fundamental shift in the media market. TV still accounts for the highest proportion of all ad expenditures; however, the Internet now attracts 5% of all advertising dollars spent. With the expansion of audio and video media consumption in the Internet space, that number is set to rise significantly over the next few years. Google as an innovative company is far from apathetic with its present state and is constantly evolving and investing in remaining at the forefront of new technology. Its Android cell phone operating system quickly became the second most popular of all cell phone OS on the market despite the apparent failure of the Nexus One phone. The rapid uptake of the Android OS leaves Google in a great position to increase its presence in the mobile market and ultimately expand its marketing presence to the mobile arena, despite the fact that Apple has shut Google out from advertising on the i-line of mobile products.
With the advent of GoogleTV and its impending launch, the company is well positioned to prosper from the continued transition of media from the old infrastructure to the new. GoogleTV is the right product at the right time in its attempt to integrate traditional television viewing with the Internet browsing experience and the company is making their move into the TV space at a time in which both the quality and quantity of media content for consumption is soaring and the prevalence of high speed Internet access makes the easy consumption of this content a practical reality. The rapid growth in YouTube is demonstrative of this trend, and although secretive about the specifics of YouTube’s earnings power, CEO Eric Schmidt did hint in January 2010 that YouTube was in the process of becoming a highly profitable entity for the company. Branching out into the TV space should only cement this trend.
Additionally, Google’s open policies through which they refuse to limit access to their network affords consumers far more options when it comes to integrating apps and software into their personal media experience (this is an area in which Apple is severely lagging). These days people want things on demand and on their own terms and Google delivers on both ends.
It’s impossible to talk about Google without mentioning China. 53% of the company’s revenues come from abroad, yet China never was all that huge a source of revenues. Clearly leaving China takes away one great avenue for growth, but the damage done to the stock’s price seems way overdone considering the lack of tangible progress they had made in the country up to this point. Furthermore, the background in which Google left China helps cement Google’s “Don’t be Evil” credo in the hearts and minds of their largest consumer-base—that of the US. As a result, the company is generally acknowledged as a do-gooder and one of the best employers to work for, thus enabling them to continue hiring the most innovative and creative minds in the world today.
Google is using that hiring position to its advantage and is in the midst of a hiring frenzy. One particularly creative avenue for Google to continue its impressive revenue growth is to actively manage its cash hoard of $26 billion in a hedge fund-like manner. Just last month, Google started hiring a team of equity, bond and FOREX traders to help generate a return for their investors. If Google can earn a fairly modest 5% rate of return over the next 5 years on its cash position, that alone could contribute an average of $1.45 billion in revenue per year during that time. After all, when you are one of the world’s best companies to work for, why pay a Goldman Sachs or JP Morgan to manage your money when you can just bring in the pieces to do it yourself? This comes along with the company’s first share buyback, which should help contribute to an ever-growing EPS number.
The stock has been hammered since the confluence of the China news, a lukewarm reaction to the stock’s 1Q earnings, and the beating that the market took on fears of the Euro contagion effect. Since the “Flash Crash” we have now seen two higher lows put in on the daily chart and some healthy basing action which provides a nice level to buy the stock against. We can use $460 as a stop-loss level, taking on 8% in equity risk on a starter position (generally start with 25-50% of what you ultimately want to own) looking to add on a break above the mid-June high of $509.25.
ValueClick (Nasdaq: VCLK)
Continuing with the theme of the rapid expansion of media onto the Internet, this next stock is one of the leading online advertising agencies. ValueClick does traditional webpage advertising and has a huge affiliate marketing program through which businesses/advertisers can build their own commission-based programs. Growth has been lackluster over the past few years; however, the valuation is compelling at these levels. The company boasts $1.96 in cash per share, representing nearly 17% of the company’s market cap, with zero debt. This makes for an interesting takeover target, and a valuable tool in pursuing new growth opportunities. In May, despite the challenging macro climate, one of the company’s directors stepped up and purchased nearly $6 million in VCLK stock.
ValueClick has had its problems of late, but the chart is indicating that the tide is now turning. With rampant volatility it is sometimes beneficial to take a step back and look at the higher time-frames for clarity. On the weekly chart, we can see a tight consolidation in which shares traded within a $0.50 cent range for the better part of two months. The consolidation was followed by range expansion to both the upside and downside. Such volatility expansion following a tight range presages a much larger move. In mid-May the stock’s share prices broke out above the key $11 resistance level despite the broader market’s pervasive weakness. Subsequently in June, VCLK back-tested and held that past resistance level and is now back on the move higher. This is our new support.
Stocks that not only exhibit relative strength, but also break key resistance levels during aggressive market declines often are leaders on the next up-move once a macro bottom is established. The steady buildup in volume during the range expansion and breakout provides addition evidence that there is strong demand for the company’s stock. So long as the broader markets hold their recent lows, there is little resistance until VCLK fills the entirety of the October 2009 gap down from near the $13 level. Look to initiate a position on a hold above the $12 level and add to it on a further push through 52-week highs at $13.94, or the $14 level.
EMC (NYSE: EMC)
It’s been impossible for any market participant/tech lover to ignore the rapid ascent in VMWare’s (VMW) share prices of late. The stock made 52-week highs in mid-May, late May and early June, all the while the broader markets took a beating. VMWare operates in the much ballyhooed “Cloud Computing” segment of software and systems operations. While I continue to like VMWare as both a trade and investment, I want to focus on a secondary play off of the company’s successful push of late— that of its parent company, EMC. EMC embodies the strengths of the technology sector on the whole: it is a company with an outstanding balance sheet, flush with cash, in a rapidly growing momentum tech space. EMC combined with VMWare provide their customers with industry-leading Cloud Computing solutions which include virtual data storage and business infrastructure services. The data storage market alone grew at a 17% clip in the 1st quarter, and EMC is that market’s dominant player. Unlike VMW, EMC did not make 52-week highs during the months of May and June; however, the stock held up far better than the broader indices.
When breaking down EMC’s valuation, the investment potential becomes clear. EMC holds $6.9 billion of cash, amounting to 18% of their entire market cap, or $3.36/share. In addition, the company has maintained an 80% interest in VMW since the partial spinoff. With VMW’s meteoric rise of late, that amounts to a whopping $22 billion and rising interest in the company, or nearly 57% of EMC’s entire market cap. Together, EMC’s cash position, combined with their stake in VMW amount to 3/4ths of the company’s market cap, or $14/share. In the end, shareholders in EMC own a company that generated $7.26 in revenues/share, growing at over 10% per year for the last 5 years and projected to grow at over 20% this coming year for a mere $4.67/share (revenues for the first quarter grew at just north of 23% and net earnings grew at 70% year over year).
Hedge fund guru and noted value investor, David Einhorn of Greenlight Capital (one of the few prominent fundies to have posted a gain, albeit a modest one during the bloodbath that was May 2010) in a recent filing showed that he significantly upped his already robust stake in the company at some point during the first quarter. EMC right now is a one-stop-shop for value and growth investors alike. Before breaking out in April, the stock spent four good months basing in the $17-18 area. While the breakout in April failed with broader market weakness, this has afforded an excellent opportunity for patient investors to position themselves for the bigger move. Initiate a starter position and look to add on either a pullback to the 50-day moving average (the blue line) at $18.85 or a breakout above the $20 resistance area. For the patient long-term investor this is an excellent value and growth play.
Illumina (Nasdaq: ILMN)
Illumina is one of the world’s leaders in genome sequencing testing. They are major players in helping people understand the nature of genetically based diseases and helping to discover new avenues for identifying and treating some dangerous conditions. This is a dynamic field right now, with several players posturing for position and Illumina is using its industry-leading technology and strong cash positions to invest heavily in maintaining and improving upon their existing line of sequencing products. While it remains to be seen which player will dominate the sequencing industry, Illumina has already established itself as a rapidly growing money-maker and is in position to take an increasing share of a cutting-edge field of science and biotechnological research.
The company is executing at a high level on both the science and the earnings front, having announced a breakthrough new sequencing platform during the first quarter—the HiSeq2000—and handily beating analyst estimates on both revenues and earnings per share. Illumina’s profits increased by 69% over the same quarter a year ago and are poised to continue rising as the sequencing field gains more momentum and the HiSeq2000 reaches market with its significantly faster sequencing time-frame.
Consistent with one of this month’s themes is the fact that this stock held up exceptionally well during the market’s rough May, making 52-week highs and settling just under its all-time highs set back in 2008. Investors should look to initiate a starter position on either a pullback to the 50-day moving average at $42.60 or a breakout above $45.60 to position for the bigger move through all-time highs at $47.90.
Disclosure: Presently long QQQQ, GOOG, VCLK, EMC and ILMN
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