Thursday, February 19, 2009
(Cont'd from above)...

Jim:       Alright, what does that all mean… when you are thinking about trying to play 3G and 4G, you know on these fancy phones… Qualcomm is the way to do it… do you know what it reminds me of, it reminds me of the old Intel inside ads… only it should be Qualcomm inside… but there is a problem… oh yea… from a technical perspective… the chart is no good… according to Julien Misler, who writes the Top Stocks Newsletter as part of thestreetresearch.com, that is part of TheStreet.com family, where I am chairman… I mean Julian is a woman who taught me technical analysis in the ‘80’s, when she was at the brokerage firm Tallen, she then went on to be the top technician at Goldman Sachs, before going out on her own to write the Top Stocks Newsletter, what does she say… she says Qualcomm is a sell, sell, sell… and belongs in the block.

What is the problem with Qualcomm according to Misler… let’s take a look at the chart… even though tech stocks have rallied in recent weeks… certainly not today… but they have been… Qualcomm has not been able to pass its January’s highs… it is an indication that buyers aren’t interested… these are technical terms, buyers aren’t interested… Qualcomm has not outperformed the semis or the NASDAQ as a whole…which means the stock has no relative strength, a technical term meaning how well a stock is doing vs. its sector… in late January, and this is probably the most important piece of information, and not technical mumbo jumbo… this stock broke its up trend line… here is where it should have been going, but it did not go there… all that is is a line illustrating the rate at which a stock should be going higher or lower… I want you to think of it as being similar to a growth rate… Qualcomm’s share price was increasing at a certain pace, but when it broke thru the uptrend line, that it means that it is now increasing at a lower rate… Misler says that that is a yellow flag… it didn’t go straight, it went like that… even worse from a technical perspective, Qualcomm broke thru that line on what is know as high volume… see here, the volume spikes right when it goes flat line instead of going higher… now remember volume for these people is like a polygraph… high volume means a move is telling the truth… it also did so on what is known as a gap down… okay… a gap is where only a handful of traders… here is a big gap down… only a handful of trades occur, it is that straight line down on the chart because buyers stepped away… and the stock was overwhelmed by people who wanted to sell… usually if there are a lot of people in buying the stock, the gap will get filled in the same day… so you would have seen it go like that in the same day, it would not have ended down, but that is not what happened with Qualcomm… it gapped down and couldn’t fill in the gap the next day… which tells chart watchers that there isn’t a lot of buying interest… and the stock is probably heading lower ultimately… another way to think of it, that is a chart that shows more supply than demand...

Now, Misler thinks that you should sell Qualcomm right here… into any strength, even a modicom of strength… because she believes the next time it goes down, it will break through the 33 level, that is the horizontal line of support… that is the horizontal line of support… she says that is going to break it… a support line is where a stock usually rallies back from, but once a stock breaks thru the line, it stops being support and then becomes resistant… basically Misler in all of this, is saying that Qualcomm will drop below $33 and maybe go as low as $30... that would be a drop that you really want to avoid… and she says that it will have a really hard time coming back again because of that resistance… so the chart that she is saying is… this goes to $30 and then it won’t get back… now using this logic Qualcomm is a better buy at $33.84 above the resistance line than it would be at $30.. .that is classic buy high sell low… so Cramer is saying as a fundamentalist… I like to look at the underlying company… not that I am a big fan of “Sinners in the Hands of an Angry God” or “Pilgrim’s Progress” but I am a fundamentalist.

So is the fundamental case for Qualcomm still sound… I think so… it has a great product cycle story, long term earnings growth, 20%… pristine balance sheet… $14B in cash… China spending $40B on wireless infrastructure… I think Qualcomm is positioned to get a decent junk of that money… the company has also been taking share with its leading customers and facing weaker competition… if you want to know why I like this stock so much… think about it like this… Qualcomm gets somewhere between $4 and $8 in royalties every time a 3G phone is sold… that is probably like your phone… they own the technology… they license it out… that is a very low cost business… 90% margins… incredibly profitable… 3G penetration expecting to increase form 40% to 70% to 80% over the next 3 years… yesterday Qualcomm announces first deal to supply Nokia with 3G smart phones chips… that is a big deal… these guys were enemies… they huge size of Nokia and the fact that the two companies were embattled in a patent dispute, tells me that Nokia realizes that Qualcomm’s technology must be used.

Now, when Qualcomm reported earnings in January, not surprisingly, it lowered its outlook… everyone else has… the company expects less of a bounce back in the second half, and the recovery was pushed out to 2010... that doesn’t change the companies earnings power of more than $3 per share… $3 per share… another chart that I like… just because of its dominance in so many different markets it is going to earn that…. stock has fallen from $56 to $33... come on man, that is already a decline… Misler may not the chart, but even a downgrade from Goldman failed to push Qualcomm lower, which tells me that a lot of the bad news is baked in… Qualcomm 18.6 times earnings… 20% long term growth rate… pristine balance sheet… opportunities galore… I think Qualcomm is worth it.

Here is the bottom line….

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