A Tech Buy and 2 Sells As the Nasdaq Reaches New Heights

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The seemingly unstoppable rise in the Nasdaq Index is disconcerting for bearish investors and for those looking for an entry point. The equal-weighted Nasdaq 100, as measured by the ETF (QQQE) rose again on the week of April 8. The index is now up 15.64% for the year-to-date. How should investors interpret bearish activity? Some of the companies with the largest short interest volume on the Nasdaq index are a starting point for investment ideas.

QQQE data by YCharts

From March 15 2013 to March 28 2013, short interest positions for the following technology companies are listed in the table below:

Company

Mar 28 2013

Mar 15 2013

% Change

CIENA Corporation

19,551,256

18,575,207

5.3%

Microchip Technology

17,529,265

18,213,938

-3.8%

Applied Materials

15,050,390

15,706,314

-4.2%

Data Source: www.bloomberg.com

1) CIENA (NASDAQ: CIEN)

Equipment component makers are a forward leading indicator for the health of telecom-based stocks In March, some analysts at FBR became more bearish on equipment makers after first becoming negative on the prospects of Cisco and Juniper Networks. Fiber networks are capital intensive, and component makers like Ciena need capex budgets from mobile telecom firms to be healthy. Otherwise, investors should brace for mediocre returns for Ciena or JDS Uniphase.

CIENA’s prospects are bright. In Q1, the company reported gross margins of 44.6%, up 270 basis points from last year. The weakest segment was optical transport, where sales declined 47%. For the current quarter (Q2), revenue is expected to be $465 million - $495 million, while gross margins will drop to the low-40’s.

Over the last year, CIENA shares are underperforming the Nasdaq, but are well-above lows reached just a few months ago:

QQQE data by YCharts

2) Microchip Technology (NASDAQ: MCHP)

Bearishness declined slightly in shares of Microchip Technology to 17.5 million shares. Betting against the semiconductor company is expensive: the dividend yield is 3.88% and shares are only around 3% below a 52-week high.

QQQE data by YCharts

Microchip Technology is expected to report earnings at the end of April. In its last quarter, earnings beat estimates by $0.02 at $0.41 per share. Revenue was over 1% higher than consensus, coming in at $416 million. The company forecast earnings in the current quarter to be $0.45 - $0.49 per share on revenue of $420.2 million - $432.7 million.

3) Applied Materials (NASDAQ: AMAT)

Bears decreased their bet against Applied Materials by 4.2% as at March 28, 2013 as shares traded close to a 52-week high. Investors thought that the company would exit the solar manufacturing equipment business. Orders were just $195 million, dropping 88% in 2012 on a 79% decline in sales.

QQQE data by YCharts

Applied Materials expects sales in the current quarter to grow by up to 25% from the previous quarter to as high as $1.96 billion. Earnings will be $0.09 - $0.15 per share.

Conclusion

Despite positive sales and earnings forecasts from Applied Materials and Microchip Technology, these two companies could be in danger of profit-taking in the short-term. Both also have a forward P/E of 19 and 20, respectively. Bearishness declined for these two companies, but risks are rising that the Nasdaq index will correct. This will give investors the excuse to sell down shares in Applied Materials and Microchip Technology. CIENA will not be excluded should markets as a whole decline, but this company has the smallest market capitalization amongst the companies mentioned. Sales over the past 5 years were nearly 19%, outpacing that of Microchip Technology and Applied Materials. A decline in shares of CIENA should be viewed as an entry point for investors who want exposure to the telecoms equipment market. 


Chris Lau has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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