Scott Moritz s Tech Focus: The Mouse Roars at Logitech

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1 In This Issue Page 1 Page 3 Page 6 Scott Moritz s Tech Focus: The Mouse Roars at Logitech Jordan Kahn s Model Portfolio: Some Favorable Signs Unfold in Fundamentals Portfolio Performance Scott Moritz s Tech Focus: The Mouse Roars at Logitech As investors jockey for pole position in the race to PC market recovery, a capable vehicle is idling just beyond the conventional view: peripherals maker Logitech (LOGI:Nasdaq). So far, investors have been intent to focus on Dell (DELL:Nasdaq) and Hewlett-Packard (HPQ:NYSE). And of course, there is a compelling rationale for doing so: Steady Dell could easily repeat its consumer success by sweeping up in the business arena, and H-P has a strong position in any number of niches. But it's hard to handicap a race when you have missed the early laps. And now, with the gangbusters growth in notebooks and liquid crystal display screens looking like yesterday's investment ideas, let me drag your weary cursor to the underappreciated category of mice, Web cams and speakers. With a potential PC upgrade buying revival as a backdrop, it isn't hard to see how the stage might be set for an outfit like Logitech. The Fremont, Calif., mousemaker is coming off an abysmal quarter, and it has warned that the current period would fall dramatically below previous expectations. The 20-year-old Swiss-founded tech shop woefully misjudged demand and subsequently overloaded supply, according to executives on a July earnings call. On July 8, Logitech preannounced a $7 million shortfall in its operating earnings. Later in the month, the company cut its fiscal second-quarter sales projections to as low as $270 million. Analysts had expected revenue of $279 million. The blunder caused a huge one-day selloff: Logitech shares fell 24% on July 9. The company honored price agreements and cleared out inventory, taking a one-time hit to earnings. With the fixes presumably in place, Logitech may be well-suited to regain some respect on Wall Street and post solid numbers once again. (Continued on the next page) PLEASE SEE IMPORTANT LEGAL DISCLAIMER ON LAST PAGE 1

2 Any pickup in PC sales will certainly make the process easier as mouse revenue squeaks higher. But beyond the standard assortment of PC gadgets, Logitech may have a few compelling offers in the gaming and video markets. Logitech makes wireless joysticks for the Sony PlayStation2 and Xbox. Notably, rival Microsoft (MSFT:Nasdaq) has decided to get out of the gaming peripherals business. Another trend that could benefit Logitech is the growing popularity of video instant messaging. Logitech's Web cams are among the top picks in the affordable yet not totally low-resolution digital camera business. But all that would be icing on the PC recovery cake. Logitech -- 1-Year 2

3 Jordan Kahn s Model Portfolio: Some Favorable Signs Unfold in Fundamentals Fundamentals: There were a lot of fundamental data points last week worth mentioning. I listened to a few of the presentations from the Smith Barney Tech Conference and heard some positive comments. In particular, chip companies generally said conditions were improving, especially for the chipequipment providers. Bellwether Intel (INTC:Nasdaq) affirmed its bullish surprise during its midquarter update. The company narrowed its expected third-quarter revenue range further to $7.6 billion to 7.8 billion, vs. its previous prediction of $7.3 billion to $7.8 billion, and gross margins are now expected to be in the upper half of the 54% to 58% range offered. Cypress Semiconductor (CY:NYSE) also raised guidance last week, saying revenue would be higher than expected due to strong demand in the consumer market and a gradual improvement in networking and wireless products. In networking, Cisco (CSCO:Nasdaq) CEO John Chambers said that August sales were slightly better than expected. While not seeing a big boost in company spending, he did say, companies are beginning to take their foot off the brakes. This is a good sign because it indicates continued strength heading into the next quarter. Two events stirred up the software industry last week. Goldman Sachs started the flow when it came out with an upgrade of the sector. Its analyst said increased operating leverage at these companies suggests they will benefit disproportionately from any improvement in IT spending. Then PeopleSoft (PSFT:Nasdaq) raised its revenue guidance for this year and next a couple of days later. Although much of the upside is expected to come from merger synergies, CFO Kevin Parker did say, We re continuing to see our pipeline improve. The wireless sector received Nokia s (NOK:NYSE ADR) midquarter update Tuesday. Investors are becoming increasingly bullish on the industry, and many wireless stocks have rocketed higher in recent weeks. While Nokia did say its third-quarter profits will be at the high end of guidance (17 cents to 19 cents), the company also said average selling prices (ASPs) were down due to consumer preferences for more low-end models. Management also cited a weak dollar and increasing competition as additional head winds. The update led to selling in the wireless industry, but after the sector s strong run, a bout of profittaking shouldn t be surprising. Outlook: bullish (+1) Technicals: The technical backdrop improved for the Nasdaq, even as the market remains in an overbought condition. The advance/decline line has been exceptionally strong, leading to positive breadth in 16 of the last 19 days. Along with expanding breadth, the number of net new highs on the Nazz reached +500, surpassing its June peak of So there are lots of stocks leading the market higher. There were two accumulation days last week, and one distribution day. The Nazz continues to hit new 52- week highs, so it s hard to pinpoint resistance levels here. I am keeping my eye on the 1950 level, which is where the index failed in March That said, investors are probably better off focusing their attention on individual stocks vs. the indices. Outlook: bullish (+1) (Continued on the next page) 3

4 Sentiment: The sentiment indicators are beginning to reflect more bullishness, but they are still not near extreme levels. In the surveys, the bull/bear spread on Chartcraft.com s Investors Intelligence survey expanded slightly (+38) and Market Vane s bullish percentage hit a new high (57%). In TheStreet.com surveys, the RealMoney survey showed an equal number of bulls and bears, while the Street Insight survey showed bears exceeding bulls almost 2-to-1. And in the options market, put option open interest in the QQQs is still extremely high. This helps explain the lack of follow-through on any pullback. Until more people abandon their put buying, or increase their level of call buying, investors can expect the same type of support underneath the market as a result of these oversized, bearish bets. Outlook: neutral (+0) Trading Points: The OmniVision (OVTI:Nasdaq) position in the model portfolio has nearly doubled. I will likely look to close this position if it closes above my $47 target. This could happen at anytime, so watch out for a possible trading alert from me. The fundamentals have not yet changed for the company, but I don t want to get piggish. This stock is volatile, and I think investors will get a chance to add it back at lower levels at some point. There are also lots of other stocks doing well, although the strong market has made many of them look extended (on a price basis) to me. But I ve wanted to add a stock with exposure to the storage industry, so I am going to step up and buy QLogic (QLGC:Nasdaq) today. Overall tech rating: +2 (bullish) (Continued on the next page) 4

5 QLogic (QLGC:NYSE): long New Positions Fundamentals: QLogic is a leading designer of a host of peripheral, connectivity devices for storage products. The company has good financial strength, with a strong, debt-free balance sheet. It also spends heavily on R&D to maintain its lead on competitors. The company is extremely profitable, having grown free-cash flow nearly 50% annually over the past five years. It boasts industry leading margins, and consistent, above-average growth in revenue and earnings. The company routinely beats estimates, making it likely that the current forward estimate picture is too low. For example, at the start of the year, EPS estimates were estimated to be $1.26. After beating estimates for the past two quarters, estimates now stand at $1.43 a share. As such, even though valuations appear somewhat stretched at current levels, I think there is a good chance that current estimates will prove too conservative. Technicals: The technical picture is also positive. The stock is roughly 4% off its 52-week high, and trading in a nice uptrend. Its relative strength is high and rising, and money flow has moved strongly positive after spending roughly six weeks in negative territory. I think the stock should make a new high soon, leaving ample room to run before it finds any meaningful resistance levels. Sentiment: The indicators are pretty neutral in this department. Short interest levels are fairly low. And there is plenty of interest in the options market on both the call option side as well as the put side. Trading Points: With the market overbought, we could see a pullback at any time. This stock is fairly volatile, so I would expect it to correct alongside the market. Therefore, investors may want to initiate positions with a half-size stake here. If the markets do pull back, that will be a chance to average down, which is how I am playing it. 5

6 Ticker Affiliated Computer ACS Affiliated Computer ACS OmniVision OVTI Qualcomm QCOM UTStarcom UTSI Trade Date Position Type Current Price Cost Basis Net Gain $ Return MSH at Trade Date MSH Return 07/08/2003 Long $ $ $ % $ % 02/04/2003 Long $ $ $ % $ % 03/25/2003 Long $ $ $ % $ % 03/18/2003 Long $ $ $ % $ % 07/15/2003 Long $ $ $ % $ % Tech Edge Closed Positions Company Sell Date Position Type Price Sold Cost Basis Gain/Loss $$ Gain/Loss % Check Point (CHKP:Nasdaq) 11/21/2002 Long $17.32 $13.10 $ % Brocade (BRCD:Nasdaq) 11/26/2002 Long $5.59 $5.77 -$ % Maxim Integrated (MXIM:Nasdaq) 12/17/2002 Short $36.59 $ $ % Activision (ATVI:Nasdaq) 12/18/2002 Long $15.00 $ $ % Palm (PALM:Nasdaq) 2/4/2003 Short $14.83 $18.41 $ % Analog Devices (ADI:NYSE) 2/18/2003 Short $ $ % KLA-Tencor (KLAC:Nasdaq) 3/18/2003 Short $38.13 $ $ % Benchmark (BHE:NYSE) 6/3/2003 Short $28.29 $28.44 $ % Garmin (GRMN:Nasdaq) 6/23/2003 Long $39.93 $33.02 $ % SAP (SAP:NYSE ADR) 7/22/2003 Short $27.59 $ $ % Intersil (ISIL:Nasdaq) 7/23/2003 Long $26.33 $16.19 $ % Quality Systems (QSII:Nasdaq) 8/19/2003 Long $39.47 $26.15 $ % Symantec (SYMC:Nasdaq) 8/26/2003 Long $54.20 $44.61 $ % Performance Total Average Return 1.53% 2003 YTD Return 11.91% Performance results listed here reflect values of stocks as of the close of the most recently completed trading day, and do NOT take into account dividends paid, interest earned or commissions. Results are updated overnight and posted prior to the market open the following business day. The 2003 YTD Return figures reflect changes since the beginning of The Total Average Return figures reflect changes since inception on 10/8/2002. The Tech Edge model portfolio below is a model portfolio of technology companies maintained by Jordan Kahn, CFA. Mr. Kahn is a Portfolio Manager at Berger Fund Advisors, a registered investment advisor that serves as advisor to a hedge fund. The performance represented here is for informational purposes only and should not be construed as a recommendation to buy any security. Holdings of the fund advised by Berger Fund Advisors are not identical to the model portfolio shown here. Please keep in mind that this is a model portfolio and does not necessarily account for the different risk tolerances, investment objectives, and other criteria used by each individual investor when making an investment decision. You are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. Past results are not necessarily indicative of future performance. **At the time of publication, Berger Fund Advisors, LLC was long ACS, NTES, OVTI, QLGC, UTSI. 6

7 Contact Information Customer Service: Please or call Mon. Fri. 8 a.m. to 6 p.m. ET Reader Feedback and Questions: Please Scott directly at scott.moritz@thestreet.com, and Jordan directly at jordan.kahn@thestreet.com. Again, please direct all account-related inquiries to customer service. About Scott Moritz Scott is a senior reporter at TheStreet.com. Before joining TheStreet.com in July 1999, Moritz was the telecommunications reporter at The Record of Bergen County, N.J., for three years. Prior to that, he worked as a municipal reporter for the same publication. Moritz received a bachelor's degree in political theory from the University of Massachusetts - Amherst and a master's degree in journalism from New York University. About Jordan Kahn Jordan Kahn, CFA, is a portfolio manager with Berger & Associates, a Beverly Hills, Calif., money manager. He is the portfolio manager for the firm's separate account portfolios and also a long/short equity fund. Before joining Berger & Associates, Kahn ran a technology-focused hedge fund at Kahn Asset Management; served as assistant director of equities research at Feldman Securities Group in Chicago, where he was also the firm's Model Portfolio manager; and was an investment analyst at the Chicago Trust Company. He holds a master's degree in Financial Markets and Trading from the Stuart School of Business at the Illinois Institute of Technology, is a Chartered Financial Analyst and holds a bachelor's degree in Economics and Finance from the University of Colorado. 7

8 Legal Information Scott Moritz, writer of The Tech Edge, is a Senior Writer for TheStreet.com. TheStreet.com is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission. We are not a registered broker-dealer. The Tech Edge also contains a model portfolio maintained by Jordan Kahn, CFA, a Portfolio Manager at Berger Fund Advisors, a registered investment advisor that serves as advisor to a hedge fund. Berger Fund Advisors and its affiliates may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in The Tech Edge or included in the model portfolio. In such cases, appropriate disclosure is made, although positions may change at any time and without notice. The Tech Edge and model portfolio contain their authors own opinions and are provided for informational purposes only. You should not rely solely upon The Tech Edge for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained herein constitutes, or is intended to constitute a recommendation by Mr. Moritz, Mr. Kahn, Berger Fund Advisors or TheStreet.com, Inc. of any particular security or trading strategy or a determination by Mr. Moritz, Mr. Kahn, Berger Fund Advisors or TheStreet.com, Inc. that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results are not necessarily indicative of future performance. As an editorial employee of TheStreet.com, Mr. Moritz is restricted from owning individual securities other than stock or options in TheStreet.com, Inc. Mr. Kahn, who is an outside contributor, is subject to certain trading restrictions when transacting for his own benefit in securities included in The Tech Edge model portfolio. SPECIFICALLY, WITH RESPECT TO SECURITIES IN WHICH HE DOES NOT HAVE A POSITION AT THE TIME OF PUBLICATION, MR.KAHN MAY ENTER ORDERS TO PURCHASE OR SELL SECURITIES ADDED TO The Tech Edge model portfolio ONLY AFTER THE HOUR OF 10:30 A.M. ET ON THE TRADING DAY FOLLOWING THE DATE ON WHICH THE SECURITY IS ADDED TO The Tech Edge model portfolio. IF YOU ENTER ORDERS TO BUY OR SELL SECURITIES AFTER 10:30 A.M. ET, IT IS POSSIBLE THAT MR. KAHN MAY HAVE PURCHASED OR SOLD THE SECURITY AT A PRICE MORE ADVANTAGEOUS THAN THE PRICE YOU WILL OBTAIN. FOR SECURITIES THAT MR. KAHN DOES HOLD AT THE TIME OF PUBLICATION OF The Tech Edge model portfolio, HE WILL NOT BE PERMITTED TO SELL THE POSITION UNTIL ONE MONTH FROM THE DATE THE SECURITY WAS FIRST ADDED TO The Tech Edge model portfolio. 8