“Feeding Frenzy for Technology Stocks: Buy Now! Six Times Better Than Gold”

By Travis Johnson, Stock Gumshoe, July 27, 2010

I was skimming through my “to do list” of email teaser ads to decide which one to focus on today, and this one floated to the top of the pile — even though it’s about a week old. It’s a pick from Louis Navellier that he says is his top rated technology stock … and while his ad specifically said that you had to get in before last week’s earnings announcement to get your huge gains, that turns out to have been, well, untrue. The stock did beat earnings estimates by a wide margin, but it’s still cheaper than it was before the earnings were announced.

But I’m getting ahead of myself — don’t we need a little of Louis’ hype to get excited about this one first?

“Louis Navellier here, and if you liked the $310-an-ounce gold play I brought you last year, you’re going to love my new breakout tech play as well.

“As you’ll see, it’s a hidden opportunity—a company that not only profits from the explosive growth in smartphones and mobile gaming but also profits from Apple’s billion-dollar iPad juggernaut—only the profits you’ll grab here could be six times as better than with gold.”

We actually haven’t seen as many of the “hidden” technology stock teasers as I might have expected — maybe that’s because of the iPhone’s “antennagate” problems (though that doesn’t seem to be hitting sales particularly hard), but I would have guessed we’d see more of these ads teasing the “behind the scenes” stocks that supply software and hardware for the various hot consumer electronics … since Frank Curzio teased TriQuint a few times for the iPhone and the iPad, it’s been fairly quiet on that front.

So thank goodness, Navellier steps in to fill the void.

The pitch that “technology is better than gold” is basically just the argument that these stocks make money and also benefit from a falling dollar, while gold just sits in a vault … here’s how he puts it:

“… while the profits of U.S. technology stocks also rise because of the falling dollar and supply and demand, they do so on a scale that simply leaves gold in the dust.

“And it’s all because technology isn’t something that can be hoarded and stored in vaults like gold is. If that were the case, we’d still be living in the Stone Age!

“Fact is, technology is the lifeblood of global growth in the 21st century—and is more important now than anytime in world history as advances in technology and demand from Asia continue to lift global economy from recession to recovery….

“… my top-rated tech play jumped 195% in 12 months while the price of gold only increased 31%”

So how about some more specifics about this company?

“Let Me Give You a Taste of What I’m Talking About Here

“This fast-growing hardware manufacturer has…

* “registered 65% revenue growth last quarter,

* “shown a forward P/E ratio of—get this—just 12,

* “offered a market cap of $10 billion,

* “handed investors 195% gains in 12 months and added 30% gains since March 31st when the company last reported earnings,

* “exhibited one of the strongest buy ratings of any of our stocks—and it’s about to clobber Wall Street and double investors’ money again.

“All thanks to mounting demand in the technology sector and falling dollar, which increases sales all over the world.”

So that’s clearly enough clues to feed into the mighty Thinkolator — and if we add in that he said that he expected the biggest profits to come “in the next three days” as the company reports another blockbuster earnings beat on July 22 (remember, this ad ran about a week ago), then we can easily confirm for you that this stock is …

Sandisk (SNDK)

Which did report very good earnings late last week — though the stock ran up to the earnings announcement a bit, and fell down in a pretty classic “sell the news” collapse immediately after earnings. For those of us who don’t trade very actively and who just look for solid growing companies with good stocks, the action around earnings was pretty irrelevant — the shares were just under $43 when Navellier sent this ad, and they’re still just under $43 despite the fact that a nimble buyer could have snuck in at $40 on Friday after earnings came out.

Sandisk is still a very highly rated pick in Navellier’s system, it’s still an “A” overall despite the fact that the “earnings momentum” category clocks in with an “F.” His system relies heavily on growing sales, growing margins, and growing earnings, and he also gives credit for analyst upgrades, so with Navellier stocks you’re almost always going to get investments that have had a big run — the idea being, similar to the strategy of the Investors Business Daily folks, that you “buy stocks that are going up.”

The standard Wall Street Media navel-gazing following the results — including the headline “Sandisk Falls” which you could have just ignored if you waited a day or two for things to settle down — indicated that the pending retirement of the well-respected CEO had an impact, and that Sandisk’s role as a proxy for Apple means they have to really beat the numbers to get the attention of the momentum jockeys.

And yes, Sandisk is a significant beneficiary of Apple’s success, just as they benefit from all other flash memory (they’re the dominant player in NAND flash, and get royalties for their designs as well as selling memory to both harware manufacturers and direct to consumers). So every iPad relies on Sandisk memory, we’re told, though it’s worth remembering that about half of Sandisk’s revenues have historically come from consumers — the little memory cards you buy for your camera, or flash drives of various sorts, and that like all other chip companies they walk a constant tightrope, falling prices and rising demand on one side, growing capacity and competition as memory, chips and similar designs become commoditized on the other, with a steady (or even growing) profit margin being the straight-ahead goal.

Pretty much every quarter you’ll hear hand-wringing from analysts about how SNDK is losing the edge, about how prices are falling too fast, or products are becoming commoditized … and that is gradually happening, as it is with most electronics products (remember when a 4gb memory card used to cost 5X what a basic digital camera goes for today? It wasn’t that long ago). Still, those concerns are almost exactly the same concerns you would have heard about Sandisk, from many of the same analysts, back in 2006 — and in the intervening four years+ the company has managed to grow revenues by only about 10%, but they’ve roughly doubled their earnings. It’s more or less the same thing that has happened with the disc drive makers, who have also gone through boom and bust and often end up looking cheap, though I think their business is suffering at the hands of Sandisk and their competitors now.

The stock is right around $42.50 today, down a bit from the 2006 highs (I chose that date randomly, it climbed dramatically from the dot-com crash into 2006-2007 and plateaued around $50, then crashed again to near $5 when the economy collapsed in 2008 and they had four quarters in a row of losses, and has climbed back spectacularly since), but is looking cheap again.

The forward PE ratio for SNDK is about 10.5, which sounds fine but reflects an expectation from analysts that the earnings will drop next year — the trailing PE ratio (we can call it the “actual” PE since this is the reported numbers, not estimates of the future) is actually lower than that, at just under 10. Analysts think they’ll earn $4.21 this year, and $4.04 next year — but it’s worth noting that analysts, despite the huge number of them who cover SNDK, are terrible at estimating their numbers, SNDK has beaten earnings estimates dramatically in each of the past four quarters (sometimes by more than 100%, though this most recent quarter was just 20% off). So a betting man might expect the numbers to come in a bit better than that four dollar range.

So you missed the “three day window” to join the fun for Navellier’s expected huge bounce, but the bounce didn’t happen — he still likes the stock, it’s still beating earnings estimates handily, and analysts are making more or less the same deprecating comments as they did several years ago … is it worth jumping on this company that supplies much of the flash memory for everything that makes modern life easier (and more chaotic, and louder)? Or have SNDK’s growth days been left in the past? Let us know what you think with a comment below.

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8 Comments on "“Feeding Frenzy for Technology Stocks: Buy Now! Six Times Better Than Gold”"

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DPink
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DPink
July 27, 2010 7:16 pm

Louis Navellier- what a joke. We now need a Tobin Smith discussion to keep the retro .com feel going… :>)

Mary Ann
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Mary Ann
July 27, 2010 10:02 pm

Navellier's touts are so outlandish. Unfortunately, I do happen to own Sandisk, and was pleased by the earnings, but bummed out of course by the drop in price upon the announcement of the retirement of the CEO.

I'll hold on to Sandisk ….I think it will continue to go higher. But in the meantime, I'll sell covered calls to hedge my bets.

fnoobler
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fnoobler
July 28, 2010 12:04 am

I'd suggest anyone investing in Sandisk should know about memristors. So far as I can tell a memristor is a single component which acts as a non-volatile 1-bit memory. Flash memory requires several components per bit, to do this. The memristor was invented recently by Hewlett Packard (I have some shares in them). More on:
http://www.hpcwire.com/blogs/Unleashing-the-Memri

I'm not saying 'don't buy sandisk', just that it's worth finding out about memristors first.

Lukester
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Lukester
July 28, 2010 2:55 am
Mary Ann – Your last name wouldn't be "Aden" by any chance would it – or would such a revelation be indiscreet on this widely watched forum. If it is "Aden" please be assured a number of us hold your advisory service in high regard. =;-) But of course, it's not Aden, is it? (The Gumshoe is going to give me a smackdown for this impertinence, for sure). And to be fair, when you scan Navellier's record across 25 years it's not bad, but he was buying the tar out of the market all the way down in the 2001-2003… Read more »
Aaron
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Aaron
July 28, 2010 12:02 pm

San Disk and other flash memory companies will continue to release larger (and smaller) cards. I bet they already have a 1TB or larger card that has been produced, but they can't release that, because that would cut the sales of 16GB, 32GB, 64GB, 128GB, 256GB, 512GB cards for future use. Who would get the smaller cards when you can buy the biggest? It would work out like the 32MB, 64MB, 128MB…etc cards that they started out with. Soon, a 2GB card will be obsolete.

jillybeans
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jillybeans
July 28, 2010 12:32 pm

I bought SNDK last January at 29.21, so I'm quite happy with it. I guess it quite depends on your investing mentality and style. If you are a day trader, it might not be the stock for you. If you buy and hold for a short time, it might work out. If SNDK drops to $39 I'll sell.
(And sometimes I sell waaaaaay too soon).

Aaron
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Aaron
July 28, 2010 12:07 pm

I forgot to mention why I said what I did. By releasing a "new" card whenever profits get low on the "old" ones, San Disk would have a nearly endless supply of aces up their sleeve to keep the stock price up, barring a whole market collapse.

rick
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rick
July 29, 2010 12:22 am

That's what I do with a lot of things that aren't too volatile.f it gets near striking, I'll buy it back and sell a higher one further down the road.

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