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Stock Watch List - VTSS

(September 23, 2004)

Again, readers are encouraged to exchange ideas and views on both our individual “stock picks” and our market commentaries.  Please start posting in our Discussion Forum today!

I would like to use this commentary to highlight a component of the semiconductors HOLDRS (SMH).  Readers should keep in mind that this is a relatively risky play – as can be witnessed by the price action of the stock during the last few years.  There is also a lot of current uncertainty over the semiconductor industry, and small caps like this usually suffer the most – both from the fear of investors and from a volatile revenue stream during uncertain times.

This stock is none other than Vitesse Semiconductor Corporation (VTSS), “a designer and manufacturer of silicon solutions and optical devices used in the networking, communications and storage industries worldwide.”  A more detailed description of the company can be found at this Reuters site.

Readers know that I am currently bullish on the semiconductor stocks.  In last week’s stock commentary, I advised my readers to take look at the SOX and the SMH – a HOLDR that is traded on the American Exchange and that can actually be bought and sold just like a regular stock (VTSS is a component of the SMH, and currently makes up 3% of this HOLDR).  At that time, I stated that I did not see the SOX penetrating the 50-day moving average anytime soon, and that consolidation may be needed in the 370 to 380 area before we embark on the next upleg.  Since that time, the action of the SOX has been surprisingly strong – a day after my commentary, the SOX was able to penetrate the 50 DMA on the upside and it has stayed above the 50 DMA ever since – despite the general market weakness in yesterday’s trading.

Despite this recent strength in the SOX and in the individual semiconductor stocks, I am going to be cautious here and ask my readers to take a “wait-and-see” approach.  Sure, both the SOX and VTSS are currently sitting on support right at the 50 DMA, but the general market is now quite weak.  The fact that the market hasn’t undergone a significant correction since early August (along with the fact that a lot of my technical indicators are still at neutral to overbought levels) doesn’t bode well for the SOX and VTSS currently holding at the 50 DMA.

The next support for the SOX is the 380 level – a level which has acted as good support during the last correction of the index.  Readers who are interested in buying the SMH may want to wait until the SOX have reached the 380 level – but any purchases here should be accompanied by a tight stop loss.

Following is the daily chart for VTSS – with obvious resistance and support at the 50-day moving average:

Vitesse Semiconductor Corporation (VTSS) - The 50 DMA has acted has both a resistance level and a support level for the last four months!

The 50 DMA for VTSS is now at $2.69 – with the next support at around the $2.50 level should VTSS decline below its 50 DMA within the next few days.  Any traders who are interested in buying this stock may begin their purchases at around the $2.50 to $2.60 level.  Please keep in mind that although the reward for buying this stock is potentially great, there is no guarantee that VTSS has begun a sustainable uptrend.

Fundamentally, VTSS is one of the few major semiconductor stocks that hasn’t announced an earnings warning (of course, I may be wrong here – the company may just announce one today or tomorrow) – in fact, VTSS has also been able to meet its earnings target in its last earnings report in late July.  More importantly, three insiders of the company (including the CEO and CFO) has also bought a significant number of shares during the March to May 2004 period.

For now, I believe both the SMH and VTSS are merely consolidating here and should resume its uptrend within the next few weeks.  I also believe that this uptrend is sustainable and any further weakness here should be bought, not sold.

Happy Trading/Investing!

Henry To, CFA

P.S. Please discuss this stock in our individual stocks discussion forum.

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