My Stock Winners

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Despite the fact that the telecommunications sector remains in a strong uptrend, we continue to see signs of heavy pessimism in the sector’s sentiment backdrop. The composite Schaeffer’s put/call open interest ratio for the sector currently rests at 0.81, which is higher than 88 percent of the readings taken during the past 52 weeks. What’s more, of the 166 analyst rating on the components of the sector, only 34 percent come in at a “buy.” This bearish configuration leaves ample room for potential downgrades.

Outlook:The Telecommunications HOLDRS Trust (TTH 36.55) spent the majority of last week consolidating its recent gains and is now perched on support at its ascending 20-day moving average. This short-term trendline has guided the exchange-traded fund (ETF) higher since late July. As pessimistic sentiment toward the sector unwinds, the ETF should enjoy further technical upside as fresh buying power moves in to lift the shares.

Utilities (UTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Skepticism is extremely heavy in the sentiment backdrop of the utilities sector. Wall Street has placed some heavy bets against the group as less than 25 percent of the 173 analyst ranking on the components of the utilities sector come in at a “buy.” This bearish configuration leaves ample room for potential upgrades. Furthermore, the number of Utilities HOLDRS Trust (UTH ?135.61) shares sold short increased by two percent in January to 2.9 million. This accumulation of bearish bets is more than 15 times the ETF’s average daily trading volume.

Outlook: In trading last week, UTH took out resistance at the 133.50 level and tagged a fresh all-time high at 135.75. With the support of its long- and short-term moving averages, we expect the sector to continue to rally as the bears leave the sidelines and jump on this strong performer.

Oil Services Sector (OSX)
Bearish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Investors look on the oil services sector with optimism despite the fact that it continues to struggle from a technical point of view. Options players have yet to fully shed their optimistic stance toward the group. The Schaeffer’s put/call open interest ratio for the Oil Services HOLDRS Trust (OIH ?139.32) comes in at 1.26, which is lower than nearly two-thirds of the reading taken during the past 52 weeks. Elsewhere, analyst rankings on the sector indicate that roughly 71 percent are “buys” or higher out of the 202 ratings offered up on the components of the group.

Outlook:The PHLX Oil Services Sector (OSX 201.40) bounced back last week on strength in the price of crude oil, but was once again stopped by resistance at the 200-202 region. This area has hindered the index’s rally attempts since mid-August. The OSX is also encountering some resistance at its 50-week moving average.

The holiday-shortened week proved to be a mixed bag for investors as they waded through data that showed a higher-than-expected increase consumer prices in January and a fresh burst in life from crude oil. By the end of the week, the S&P 500 Index (SPX) had dropped 0.3 percent and the Dow Jones Industrial Average (DJIA) shed 0.9 percent.

On the other hand, as if in an effort to keep things interesting, the Nasdaq Composite closed the week with a gain of 0.75 percent and the Russell 2000 Index (RUT) jumped nearly one percent. Both the DJIA and the RUT tagged new all-time highs during the week, while the SPX and COMP hit fresh multi-year highs.

Now are these new highs in the broad market drumming up heavy call buying activity? Hardly. On Friday, traders once again preferred to turn their sights to the put side, which is consistent with the big put accumulations that tend to take place the week after expiration and consistent with a market that is under pressure as a result.

On Friday, the SPX saw more than 332,000 put contracts trade, while the Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) had nearly 105,000 puts change hands. Meanwhile, the iShares Russell 2000 Index (IWM: sentiment, chart, options) have put volume of more than 363,000 contracts cross the tape.

In fact, since February options expired, speculators have loaded up yet again on the put positions when it comes to the broad-market exchange-traded funds (ETF). Prior to Friday’s activity, SPY put open interest among options with fewer than three months until expiration has grown by 121,000 contracts compared to only 41,000 new calls added since February expiration. The IWM had its put open interest swell by 307,000 contracts versus fewer than 194,000 call additions.

Even the Nasdaq-100 Trust (QQQQ: sentiment, chart, options) came under fire last week, as put open interest exploded by nearly 481,000 contracts and call open interest increased by 118,000 contracts.

Not surprisingly, the Schaeffer’s put/call open interest for SPY, IWM, and QQQQ all rest above 2.0 and this was true throughout the course of last week. In other words, put open interest more than doubles call open interest for each of these ETFs among near-term options. This is the first time since September and October 2006 that all three of these broader-based exchange-traded funds boasted put/call open interest ratios that exceeded 2.0 simultaneously.

Yet, as I stated in the March edition of the Option Advisor newsletter, I feel that the true bullish opportunity lies with the RUT rather than with the tech-heavy COMP. With the exception of the tech bubble from 1999-2001, the COMP has been a consistently flat performer as compared to the SPX.

Conversely, the RUT continues to rally despite Wall Street’s proclamation that the small-cap sector is dead. The index’s weekly relative-strength measure versus the SPX found support at its 80-week moving average during its pullback from its 2006 peak and has now taken off. It also doesn’t hurt that the RUT has taken out round-number resistance at the 800 level.

Overall, we continue to see a growing number of parallels between the current market environment and the market environment of 1995. Joseph Keating, chief investment strategist at First American Asset Management, recently pointed out in an article that the SPX’s price-to-earnings (P/E) ratio fell to 17 as of the third quarter of 2006 ?lowest since mid-1995. Meanwhile, the SPX has now gone 221 days without a two-percent correction. This compares to the 223-day streak experienced in 1995.

Furthermore, we find the market in another in a low-volatility environment, as the CBOE Market Volatility Index (VXO) currently hovers around levels similar to those we saw in 1995.

The market started an impressive rally in 1995, and while past performance does not guarantee the future, there are some interesting similarities. It is also worth noting that investors continue to build a wall of worry for the market to climb. To paraphrase the great contrarian Humphrey Neill “The crowd is most bold when it should be cautious and prudent and most fearful when it should be bold.”

———— Xcel Energy, Inc. (NYSE: XEL) ————

Insider Name: Fredric W. Corrigan
Insider Position: Director
Insider Action: 10,000 shrs on 2/20/2007
Insider Total Holding: 10,000 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 18.2 (Industry Average 22.8)
P/S Ratio = 1.0 (Industry Average 1.67)
P/CF Ratio = 7.10 (Industry Average 11.6)

Industry: Electric Utilities

——————————————————-
Other Merits…

Dividend Yield = 3.7%

———— Xcel Energy, Inc. (NYSE: XEL) ————

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Pessimism continues to dominate the sentiment backdrop of the telecomm sector. The composite Schaeffer’s put/call open interest ratio for the sector currently rests at 0.80, which is higher than 88 percent of the readings taken during the past 52 weeks. What’s more, of the 166 analyst rating on the components of the sector, only 34 percent come in at a “buy.” This bearish configuration leaves ample room for potential downgrades.

Outlook:The Telecommunications HOLDRS Trust (TTH ? 36.70) rallied with the rest of the market last week, gaining more than two percent as it outpaced the SPY. The ETF bounced off support at its ascending 20-day moving average and also found support at its 10-day trendline as it tagged a new annual high on Friday. As pessimistic sentiment toward the sector unwinds, the ETF should enjoy further technical upside as fresh buying power moves in to lift the shares.

Utilities (UTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Skepticism is extremely heavy in the sentiment backdrop of the utilities sector. Wall Street has placed some heavy bets against the group as less than 26 percent of the 184 analyst ranking on the components of the utilities sector come in at a “buy.” This bearish configuration leaves ample room for potential upgrades. Furthermore, the number of Utilities HOLDRS Trust (UTH ? 133.15) shares sold short increased by two percent in January to 2.9 million. This accumulation of bearish bets is more than 15 times the ETF’s average daily trading volume.

Outlook: Technically speaking, the ETF continued to claw its way higher last week, closing the week with a gain. The trust continues to battle resistance in the 133.50 region, which capped the shares from the beginning of December through the start of January. In trading last week, the trust briefly popped above this resistance area to notch a high of 134.36.

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The broad market put in solid performance last week, resuming its string of positive returns during options expiration after stumbling slightly into negative territory during January. The Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) added 1.2 percent last week, while the Dow Jones Industrial Average (DJIA) jumped 1.5 percent to close at a fresh all-time high. In fact, 10 out of the past 14 expiration weeks saw the SPY finish with a positive gain.

While we’re on the topic of technicals, the S&P 100 Index (OEX) briefly conquered the 670 level to tag a high of 671.47 and even closed one trading day above the round-number mark before retreating once again. The index closed the week back below 670 level.

Elsewhere, the CBOE Market Volatility Index (VIX) for SPX options slipped below 10 on February 14 to tag a low of 9.70 before it quickly bounced back above the round-number level. During the rest of the week, the VIX managed to hold above the 10 level, but the relatively low VIX could entice a number of options players to snatch up put options when trading starts today in an effort to lock in some “cheap” protection. This would put downside pressure on the market.

As we have seen in the past, while expiration week tends to be strong for the market, the week following option expiration is often marred by a pullback in the major indices. Frequently, traders will jump back into put positions now that their previous positions have expired. This swelling in bearish bets is accompanied by hedging among the traders who take the other side of that trade and sell the puts, another factor that creates downside pressure.

Turning to a chart of the VIX, I found that over the past year, VIX peaks have been in the first half of the month, with the very notable exception of May 2006 and also November 2006 (July 2006 is on the bubble).

Another way of framing this could be that in the post-expiration period each month (always in the second half), market performance is “challenged” by the fact low VIX periods attract put buyers and stock sellers. A better explanation might be that the rise in the VIX from the second half of a typical month into a peak in the first half of the next month is the result of the accumulation of index puts in the new front month, with the VIX peaking (and selling pressure lifting) once all the put demand is satisfied.

Looking at the implied volatility readings for SPY out-of-the-money options, we continue to see the implieds for the exchange-traded fund’s (ETF) puts increasing at a faster rate than for its calls. Furthermore, the 10-day moving average of the ratio comparing put implieds against call implieds looks very much like the action coming out of July 2006 bottom and the beginning of the fourth quarter. In other words, periods preceding very bullish market action, thus suggesting that the market is in a favorable position from a risk-reward perspective looking out over the next several weeks, which means any downside we could see in the short-term is muted relative to the upside potential in the coming weeks. That would mean pullbacks should be viewed as buying opportunities.

On the other hand, the same ratio of put implied and calls implieds for the Nasdaq-100 Trust (QQQQ: sentiment, chart, options) options is on the decline, indicating that options speculators are exhibiting a growing preference for calls over puts. In the past when we saw this growing divergence between the SPY and QQQQ ratios, the tech-laden QQQQ showed weakness relative to the SPY during the following few weeks before a brief period of outperformance relative to the SPY.

While this week may be plagued with broad-market weakness as traders pile back into their protective puts, this swelling of bearish bets simply forms the building blocks for the wall of worry that the market continues to climb over the long term.

Trading Tips ? Introduction to Fibonacci ? Part I

It should be no surprise to most of you that, in addition to the tools and knowledge that you bring to trading, the mental component is equally, if not more, important. In order to act at the right time, not only must you have done the analysis, but you also must have confidence in your analysis. Novice traders will often go through a frustrating period where they act too late, and the next time act too soon, losing money both times. This is sometimes the result of faulty analysis, but more often it is because they lack the confidence to act based on their analysis. Of course, everyone is different, and some successful traders require just a minimum of analytical tools to trade successfully, while others prefer to have several confirming analytical tools before making their decision. Fibonacci analysis is one such technical tool, and it is based on a series of numbers developed by an Italian mathematician, Leonardo Fibonacci, in the 12th century. From a trading perspective there are many basic as well as advanced ways that they can beneficial to the trader. Suffice it to say that this series of numbers and the relationship of one number to another in the series have been found throughout nature. The most notable relationship can be found by dividing one Fibonacci number by the next one in the series, which will give you the golden ratio, 0.618.

Figure 1

There are two primary ways that I use Fibonacci analysis in my trading, one is to further identify or confirm support or resistance levels and the other is to help identify price targets. In this article I will concentrate on identifying levels of support. Often times, a trader will look at a market and realize that when they were not paying attention a significant level of support or resistance was broken and the market has already moved significantly confirming the breakout. The problem then becomes determining a favorable level at which to enter the market. Many times, the novice will wait several days for a correction, but won?t have enough patience, and end up jumping in at just the wrong time. Fibonacci analysis can help the trader to better define both their entry and exit price. For these examples, I will use long-term data of Euro FX global futures, which will demonstrate that the Fibonacci relationships can repeat over and over again. The euro declined from its inception in January 1999, and in late 2000 and early 2001 formed a double bottom formation (see blue arrow). The euro turned up in 2002, breaking first its short-term downtrend and then confirming the double bottom on June 1, 2001 (point 1). This chart shows a series of rallies and declines over the next four years that are labeled ?a? through ?i.? We will discuss each of these phases in more detail.

========= Undervalued Stock #1 ==========

————– Assurant Inc. (NYSE: AIZ) ————–

Insider Name: Howard L. Carver
Insider Position: Director
Insider Action: 2,000 shrs on 2/14/2007
Insider Total Holding: 16,521 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 9.8 (Industry Average 16.8)
P/S Ratio = 0.84 (Industry Average 1.05)
P/B Ratio = 1.76 (Industry Average 2.94)

Industry: Health & Accident, Insurance

——————————————————-
Other Merits…

Dividend Yield = 0.7%

————– Assurant Inc. (NYSE: AIZ) ————–

========= Undervalued Stock #2 ==========

———— L-3 Communications (NYSE: LLL) ————

Insider Name: Peter A. Cohen
Insider Position: Director
Insider Action: 15,000 shrs on 2/13/2007 to 2/14/2007
Insider Total Holding: 87,500 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 20.85 (Industry Average 24.57)
P/S Ratio = 0.88 (Industry Average 4.98)

Industry: Communications Equipment

——————————————————-
Other Merits…

Dividend Yield = 1.10%

———— L-3 Communications (NYSE: LLL) ————

It is often easier to visualize the cross over points by viewing the DIosc as a histogram, so I have added the DIosc in histogram form to the bottom of the chart in Figure 2. You will also note that short-lived signals, such as those given in early 2001, are more easily identified. However, I recommend that you plot both the lines and histogram, as it is important to note the slope of both lines, as well as their actual values. Neither of these qualities is available in the histogram version. Another thing that I have changed on this chart is that I have used candlesticks instead of a bar chart. I have noticed that significant candle formations often accompany the crossovers in the DI+ and DI-, and for this reason, I have decided to include candlesticks. Because of the scaling, the bullish candle formation is not as easy to see on this chart (see point 1), so I have just highlighted the bearish formations as indicated by the circles labeled a, b, and c. If you examine these three periods, you will realize that candle reversal formations preceded or coincided with the DI- crossing above the DI+.

Welles Wilder advocates using what he called the ?extreme point rule? with crossings of the DI+/DI. This adds a risk management component to the crossings, a critical ingredient to any trading method. The figure above has a weekly chart of Lehman Brothers Holdings (LEH) on the left and a daily chart on the right. Below each chart is plotted the DIosc, using 9- and 14-periods, respectively; because of space limitations, the plots of the individual DI+ and DI- lines are not shown. There are several periods on these charts that I would like you to examine in more detail using the extreme point rule. The first occurred on June 10, 2005 (box a), as the weekly DIosc turned positive. For that week, LEH made a high of $47.89 and a low of $46.16, and the extreme point rule would therefore tell a trader that the positive signal would stay in place as long as the low of that week ($46.16) was not violated. This level is shown on the chart. Now if you look at the corresponding box (a) on the daily chart, you will note that LEH corrected the first two days of the following week with a low on June 14th of $46.21. The strong close the next day provided strong evidence that the uptrend had resumed.

LEH continued higher for the next six weeks as it gained about 15% before closing a bit lower the week of July 29, 2005. This was the start of a period of consolidation as the daily chart shows a continuation pattern (lines 1 and 2). The weekly DIosc stayed solidly positive during this period while the daily DIosc dropped into negative territory several times as the triangle was forming. Since the weekly DIosc was positive, only long signals would have been taken. Trading exclusively from the signals (ignoring the chart formation), the first daily buy signal came with the close on August 10th. Long positions established the next day on the opening ($52.42) should have been protected with a stop under the August 10th low of $52.23. This stop would have been hit in the next few days as LEH dropped to a low of $51.55. Another positive daily signal was given on August 18th, and longs established at $52.65. The following day?s open should have used a stop under the 18th?s lows of $52.10. LEH moved higher for a few days, reaching a high of $53.18 before reversing on August 24th and dropping to a low of $51.57. I am reviewing these trades in detail so as to illustrate that even though they resulted in losses, the extreme point rule kept the losses very small.

Trading Basic -The Directional Movement Oscillator
In earlier articles, I demonstrated how the average directional movement index (ADX), developed by Welles Wilder, could be used to identify trending and non-trending markets. Though the ADX formula is fairly complex, it is derived from the DI+ and the DI-, which can also be used to generate buy and sell signals.

As is the case for each of the indicator?s featured here, I like to use them on multiple time periods for the same market. This is a technique used by many traders, since just taking the signals based only on the time period that you trade can result in too many trades against the dominant trend, often resulting in losses. In the chart above, we have a weekly chart of Boeing (BA) from early 2000, through the first months of 2002. Below the bar chart there are two lines: the nine-week minus DI (or DI-) in red, and the nine-week DI plus (or DI+) in green. I prefer to use the nine-period on the weekly data and the fourteen-period with the daily data. The most basic interpretation is that when the DI+ is above the DI-, it is positive, when the DI+ is below the DI-, it is negative. When both lines are close together, and particularly when they are declining, it is consistent with a non-trending market. In the latter part of May 2000, the DI+ moved above the DI- at point 1. The two lines stayed well apart until early December as the DI+ started to decline, and crossed below the DI- on the first week of 2001. For the next three months, both lines were flat and below 20 until the week of March 16, 2001, when the DI- moved above the DI+. Though BA did decline the next week, it turned higher the following week, and three weeks later, the DI+ crossed back above the DI- (point 3). This positive signal lasted until the middle of June when the DI- rose sharply, surpassing the DI+ at point 4. During the next few months the DI- rose very sharply consistent with a trending market. This negative signal stayed in effect until January 2002.

Telecommunications (TTH)
Bullish
Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Pessimism continues to dominate the sentiment backdrop of the telecomm sector. The composite Schaeffer’s put/call open interest ratio for the sector currently rests at 0.80, which is higher than 88 percent of the readings taken during the past 52 weeks. What’s more, of the 166 analyst rating on the components of the sector, only 35 percent come in at a “buy.” This bearish configuration leaves ample room for potential downgrades.

Outlook:The Telecommunications HOLDRS Trust (TTH ? 35.97) pulled back with the rest of the market on Friday, but managed to hold onto support at its rising 20-day moving average. As pessimistic sentiment toward the sector unwinds, the exchange-traded fund (ETF) should enjoy further technical upside as fresh buying power moves in to lift the shares.

——————————————————————————
Utilities (UTH)
Bullish Sector trading above its…
20-day Moving Average: YES
50-day Moving Average: YES
100-day Moving Average: YES

Sentiment:Skepticism is extremely heavy in the sentiment backdrop of the utilities sector. Wall Street has placed some heavy bets against the group as less than 26 percent of the 184 analyst ranking on the components of the utilities sector come in at a “buy.” This bearish configuration leaves ample room for potential upgrades. Furthermore, the number of Utilities HOLDRS Trust (UTH ? 132.50) shares sold short increased by two percent in January to 2.9 million. This accumulation of bearish bets is more than 15 times the ETF’s average daily trading volume.

Outlook: Technically speaking, the ETF continued to claw its way higher last week, closing the week with a gain. The trust is currently battling resistance in the 133.50 region, which capped the shares from the beginning of December through the start of January

Broad-market weakness on Friday wiped out any hopes from a relatively flat finish for the week. The S&P 500 Index (SPX) closed the week with a loss of 0.7 percent and the Dow Jones Industrial Average (DJIA) shed 0.6 percent. Meanwhile, the S&P 100 Index (OEX) continues to struggle with resistance at the 670 level. The index briefly tackled the round-number region on Tuesday and Wednesday, but couldn’t hold onto its gains to close either session above 670. Wth all three indices perched on their respective 10-week moving averages, it will be interesting to see if they make another run at new-high territory.

Judging by the market’s past performance during option expiration week, stocks could be poised to make some gains this week. In columns prior to the January and December expirations, I touched on this trend in the Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) to post positive results during expiration week.

I think one potential reason for the upside bias in expiration weeks is the unwinding of heavy out-of-the-money puts that accelerates during that week. As these out-of-the-money puts are bought back to capture what little time value is left, those who took the other half of the trade and sold the puts are able to buy back the SPY shares they sold as a hedge against the short put position. This unwinding action in turn helps to add buying pressure to the SPY during expiration week

Since January 2006, the SPY finished only four expiration weeks in negative territory, while the average return during the week comes in at a gain of 0.55 percent. Below I have listed the weekly gains for the SPY during expiration week.

Speaking of puts, the various exchange-traded funds (ETF) that follow the broad market have seen a flood of put activity following January options expiration. Since January 22, the SPY added roughly 270,000 calls among options with less than three months until expirations, while nearly 440,000 puts were added. During the same time frame, the Nasdaq-100 Trust (QQQQ: sentiment, chart, options) saw put open interest swell by 800,000 contracts, but call open interest gained just 350,000 contracts.

But the real eye-catching growth was on the iShares Russell 2000 Index Fund (IWM: sentiment, chart, options), as call open interest jumped by 215,000 contracts and put open interest grew by nearly 600,000 contracts. Now keep in mind that this explosion of put open interest occurred as the IWM broke above staunch resistance at the 80 level. Even after the pullback on Friday, the ETF managed to close the week above this round-number mark. Not only is this growing put open interest signal lingering pessimism among options traders (or a sign of cautious optimism as hedging activity accelerates on long small-cap positions), which had bullish implications from a contrarian perspective, but also the unwinding of hedges against these bearish bets could help to buoy the market this week.

Taking a look at options from another angle, I find it interesting that the implied volatility of three-percent out-of-the-money puts on the SPX are priced 60 percent higher than out-of-the-money call implieds. The difference between the two is at a two-month high and near the upper end of a 13-month range. This preference for puts grew as the market made multi-year highs last week.

The chorus expecting a correction is getting louder and louder. Traders continue to point to the fact that it has been several months since the market last suffered a two-percent down day. As a result, put open interest grows, creating a classic “wall of worry” for the market to scale.

But the market is not without its stumbling blocks. One of them continues to be the 670 level for the OEX. We saw a similar roadblock in December and January at 665.

A second concern is the 10 level on both the CBOE Market Volatility Index (VIX) for SPX options and the CBOE Market Volatility Index (VXO) for OEX options. Breaks below 10 send many traders rushing to load up on puts in an attempt to snatch up some portfolio protection while it is “cheap.” The resultant hedging related to the puts shoves the market lower. As we have seen in the past, dips into single-digit territory by the VIX is quickly followed by a sharp, but brief, drop in the market.

========= Undervalued Stock #1 ==========

——— Dominion Resources, Inc. (NYSE: D) ———

Insider Name: Mark J. Kington
Insider Position: Director
Insider Action: 2,000 shrs on 2/2/2007
Insider Total Holding: 13,699 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 19.0 (Industry Average 23.4)
P/B Ratio = 2.28 (Industry Average 2.63)
P/CF Ratio = 9.80 (Industry Average 11.40)

Industry: Electric Utilities

——————————————————-
Other Merits…

Dividend Yield = 3.30%

——— Dominion Resources, Inc. (NYSE: D) ———
========= Undervalued Stock #2 ==========

———— Johnson & Johnson (NYSE: JNJ) ————

Insider Name: Charles, Prince
Insider Position: Director
Insider Action: 5,000 shrs on 2/2/2007
Insider Total Holding: 11,000 shrs

——————————————————-
Undervaluation Merits…

P/E Ratio = 17.7 (Industry Average 22.6)
P/S Ratio = 3.58 (Industry Average 4.22)

Industry: Major Drug Manufacturers

——————————————————-
Other Merits…

Dividend Yield = 2.30%

———— Johnson & Johnson (NYSE: JNJ) ————

========= Undervalued Stock #1 ==========

—— INTERVOICE INC (NasdaqGS:INTV) ——

Insider Purchases - Last 6 Months
Purchases 21,000 4
Sales N/A 0
Net Shares Purchased 21,000 4
Total Insider Shares Held 388.76K N/A
% Net Shares Purchased 5.7% N/A

——————————————————-
Undervaluation Merits…

P/S Ratio = 0.92 (Industry Average 2.92)

——————————————————-
Other Merits…

Dividend Yield = 6.40%

Net Institutional Purchases - Prior Qtr to Latest Qtr
Net Shares Purchased 1,441,060
% Change in Institutional Shares Held 5.8%

It was very interesting to read the conference call from Cisco Systems. The chief executive officer, Mr. John Chambers, basically said that the “killer app” is video. The part of Cisco that had the highest margins was Scientific Atlanta, which makes the set-top boxes for video.
To have video as the killer app means that there has to be a lot of bandwidth that is speedy.
Yesterday, as well, Steve Jobs said that DRM should be eliminated, so that all digital media can be interchangeable and used on all digital media players.
What we are seeing here, is a change of the foundations, of digital media.
The next generation of media players will need much more memory to be useful. That means, of course, that high density and quality NAND flash will have to be available and AFFORDABLE.
Steve Jobs, yesterday, also said that margins are improving for his products, because of the decrease in the price of NAND flash.
When you put all of this together with Eli’s presentation at Stanford, you realize what it all means.
In his presentation, he basically said that the digital photo business was only for the early adopters until the Internet became available. Then everybody wanted to get digital cameras, which in turn needed digital film, which was the flash card.
We are now at a very similar point in time. Now, however, as John Chambers said, the killer app is video. There will be a huge demand for quality high-capacity X4 MLC NAND flash.
Who will make this NAND flash? Well, it will be SanDisk Toshiba in Fab 3 and later on in Fab

4. These will be the most cost-effective fabs on the planet. Therefore, they will be the low-cost provider and that means that all the other manufacturers, will either have to license their technology or else switch to another type of memory.
You can now see why Eli was so proud at the CES to present all of SanDisk’s new products. The USB TV product as well as digital media players.
I think, that most of this media will be transferred by high-speed wireless. That probably will be a combination of cell phones, WiFi, Wi-Lan, and other transmissions.
Unless, you have fiber-optic cables, wires will not be able to do the job.
All of these products need encryption. It was clear at the RSA conference that encryption is a very big topic.
Remember, Rim started with an e-mail product about eight years ago and look where it is now. The encryption was done by another Waterloo, Ontario company called Certicom. They have ECC TECHNOLOGY which is now approved by the national security agency. The encryption is in the device.
All of these events are coalescing at the same time.
Therefore, I think we are about to see an order of magnitude change in the delivery and products for digital media. Eli had the vision and has set up SanDisk to be one of the most important cogs in that wheel.
The crash in NAND price, that we see now, is basically the liquidation of old technology NAND.
The high density quality NAND will be in great demand and that is the reason that the new fabs are being built. Per megabit, they are cheap because of the increased size of the wafer and 56 nm architecture.
Remember Moore’s Law and the fact that everyone thought we were at the limit. Both IBM/Toshiba/AMD, and Intel, have shown new materials which will make the flash chip architecture even smaller.
That means that the cost per megabit is going to be exponentially cheaper once again.
In summary, all the companies noted above, are probably very good investments to buy now. Analysts, as a rule, do not have a lot of vision and are always stymied by marked changes in technology. I am pretty sure that this will happen. We will see what is said today in SanDisk’s conference. I think we will see much more of the future at SanDisk’s investors meeting in late February.