The Option Investor Newsletter Wednesday 07-26-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/072600_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 07-26-2000 High Low Volume Advance/Decline DJIA 10516.50 -183.50 10692.50 10516.50 1.18 bln 1364/1475 NASDAQ 3987.72 - 41.85 4002.70 3906.55 1.74 bln 1588/2366 S&P 100 791.19 - 11.25 800.94 791.19 totals 2952/3841 S&P 500 1452.42 - 22.05 1472.08 1452.42 43.5%/56.5% RUS 2000 513.81 - 0.52 514.33 503.92 DJ TRANS 2800.34 - 8.98 2817.10 2790.77 VIX 22.75 + 1.08 23.23 22.13 Put/Call Ratio .51 ****************************************************************** Earnings Disappointments Make for a Gloomy Day on Wall Street As earnings continue to hog the spotlight, we are seeing confirmation that investors are less concerned about the actual earnings numbers and are instead focusing on the forward-looking statements about revenue for the remainder of the year. XRX kicked this trend back into high gear this morning as they reported earnings a penny ahead of estimates, but cautioned that estimates for the rest of the year are too high. Without so much as a whimper, the DJIA plunged through the tenuous 10700 support level this morning, and that was only the beginning. Although finding support above the 10500 level, the heavy selling volume (just under 1.2 billion shares) hit almost every sector and the Industrials gave up -183.49 to close at 10516.48. Nearly 70 points disappeared at the close as fund managers reshuffled their holdings to make room for their required acquisition of JDSU (see details below). Breadth was mixed with 1363 advancers outpaced by 1474 decliners, although new highs beat out new lows by 90 to 78. Lest you think all was negative today, we did get one positive earnings surprise from Oxford Health (OXHP), as the company reported earnings of $0.36, blowing away estimates by 33%. The company was rewarded by a strong move, as investors snatched up shares and pushed the price up nearly 10% on triple the average daily volume. The biggest bright spot at the NYSE came from the Insurance sector, as a number of brokerage firms came forward with positive comments and upgrades, indicating the sector’s recent rally may have legs. Bear Stearns upgraded AON Corp. (AOC) from Attractive to Buy, while Merrill Lynch chimed in with a Buy rating, up from Accumulate. The St. Paul Companies (SPC), which is due to report earnings tomorrow morning, received a Salomon Smith Barney upgrade from Neutral to Buy, and the positive sentiment was palpable as buyers flocked to the sector like moths to a flame. Besides AOC (+2.94) and SPC (+2.38), other winners were AIG (+1.13), CB (+2.44), HIG (+3.06) and PGR (+3.88). Although the gains were not huge, anything that was in the green today was impressive, given the broad market weakness. The small rally on the NASDAQ yesterday afternoon did indeed turn out to be a bear-trap rally as the index headed lower right from the open. Gapping below 4000 opened the door for a quick slide, as selling pushed the Composite down -120 points within the first 90 minutes of trading. Semiconductor and Internet weakness led the decline (see below for details), and fortunately support held at 3900. Although the NASDAQ spent most of the day recovering from its lows, it was unable to get back above 4000 before the close, and breadth was decidedly negative. 2368 declining stocks beat out 1591 advancing stocks and 133 new lows swamped a mere 43 new highs. So much for the tenuous recovery in Semiconductor stocks. Providing belated vindication for Jonathan Joseph (remember his downgrade of the entire sector a couple weeks ago?), the entire sector bled heavily today. So what happened, you ask? LSI had a disappointing earnings report last night after the close, and the selling that took place in the after-hours session accelerated this morning, pushing the stock ever lower, closing at $31 for a 28% loss. As if that wasn’t enough to tank the sector, INTC decided to pick a fight with RMBS, announcing that it will release a chipset that serves as an intermediary between the processor and the rest of the computer components. This will allow PC makers to use standard, relatively inexpensive computer memory in Pentium 4 desktops. INTC is also investigating how to adopt the chipset to an enhanced version of standard memory called DDR DRAM that more directly competes with RMBS memory. This marks a significant departure from INTC’s product roadmap, which officially contained only RMBS memory for its Pentium 4 chipsets. The impact on the sector could be significant and investors responded by slicing -$9.50 off the price of RMBS and -$1.88 from INTC. The negative sentiment bled into the entire Semiconductor sector, with virtually everything in the red. Some of the more notable losers were ALTR (-10.63), XLNX (-4.13), NSM (-4.13), and AMD (-3.44). Reporting better than expected earnings last night (5 cents vs estimates of 3 cents) wasn’t enough to prop up shares of EBAY, and the online auction leader gave up -$3.56 today to close at $52.69. Further pressuring the Internet sector was a downgrade for AMZN ahead of their earnings announcement tonight after the close. Holly Becker of Lehman Brothers said she was “throwing in the towel on Amazon” cutting her rating from Buy to Neutral. This came on the heels of Tuesday’s downgrade by Tom Courtney of Banc of America Securities. Courtney cut his rating on the company from Strong Buy to Buy and withdrew his price target of $80, saying he would revise it after the company’s earnings estimate. AMZN gave up -$1.56 in the regular session and despite posting a smaller than expected loss (-$0.33 vs. estimates of -$0.35), traded below $34 in the after-hours session. Ok, let’s get to the big story of the day, JDS Uniphase (JDSU). As we have reported recently, the company went into the S&P 500 after the close today, replacing Rite Aid (RAD). Anticipation of the move has kept the volume very high on JDSU for the past week, and the price had been bouncing between $130 and $140. Today saw new levels of interest as nearly 120 million shares traded hands in the regular session ahead of earnings to be reported after the close. As promised, the company beat even the high end of estimates, posting $0.14 vs. the consensus of $0.12, and followed up with a bullish conference call. Revenues increased 33% quarter-to- quarter, and 173% year-over-year, and management stated that the only limitation on their revenue growth is how fast they can make and sell their red-hot Optical products. The frantic pace didn’t slow down after the close either, as JDSU traded over 87 million shares (no, I didn’t leave out a decimal point) in the after-hours session, for a total daily volume of more than 200 million shares. JDSU closed the regular session at $135.94, but traded down after hours. The collateral damage from this heavy action was felt in the S&P 500 as fund managers sold other index components to make room for shares of JDSU. The reason for this impact is that the market capitalization of JDSU is fully 100 times that of RAD, and since the index is market-cap weighted, literally all of the other 499 components had to be reshuffled to keep the index balanced. Market weakness continues, and it is looking more and more like we have already had our summer rally. Even companies that are releasing stellar earnings are seeing shares of their stocks being sold on the news, while failing to meet earnings AND revenue growth estimates has become the cardinal sin. Take a look at RMDY - they announced earnings 4 cents above the street estimate last night, but their revenues were disappointing (notice the common theme, here?) and the stock shed nearly 50% of its value today to close at $22.38. The VIX continues to lurk around 22, and the slight move up to 22.27 at the close tonight isn’t nearly enough to get us out of the danger zone. As earnings season winds down, we can see that even the host of strong reports hasn’t been enough to incite anything approaching a wild summer rally. Investors’ focus seems to be shifting back to the economy in the near term, with the Employment Cost Index (ECI) report taking center stage tomorrow morning. Forecast to come in unchanged at 1.4%, anything stronger than this may re-ignite concerns that the Fed could throw one more rate hike at the market at its August meeting. This type of nervousness, coupled with the normal summer slowdown as investors and fund managers alike go on vacation, makes it look increasingly unlikely that the markets will have sufficient motive to move higher over the next 5 weeks. Although it is starting to sound like a broken record, I feel compelled to echo Jim’s cautionary statements from last night’s Wrap. Use extreme caution in opening any new long positions and tighten up your stops on open positions. It is unclear which way the markets will move for the balance of the week, but today’s downward bias confirmed the recent trading ranges for both the DJIA and the NASDAQ. The incentive to drive this market higher is rapidly evaporating as earnings wind down, so don’t assume that every dip will be met with a bounce. We need to pay attention to the market and trade the trend. If you don’t see it, there is no shame in sitting out and hanging onto your cash. Mark Phillips Research Analyst *************************Advertisement*************************** American Express® Cardmembers are buying online Find out more! http://click.linksynergy.com/fs-bin/stat?id= MH64V9Lgzgc&offerid=13447.10000026&type=1&subid=0 ***************************************************************** *************** ASK THE ANALYST *************** The Summer Semester Is Nearing Its End By Eric Utley It's time to grade yours truly. Unfortunately, the report card is already in the mail. You might be thinking summer and school? The two don't jive! Well, ours is the school of making money in the stock market. So, I thought the analogy fit. As the summer winds down and traders anxiously await the arrival of fall, I thought it relevant to review some of the best and worst of this column. Our triumphs and tragedies, if you will. After all, if we don't study our methods we're bound to repeat mistakes, and potentially overlook future successes. Speaking on the latter, Jesse Livermore once said, "They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side." My aim, over the next several weeks, is to get OIN readers on the right side more often than not. I hope to pinpoint the conditions that led to success in the stocks we have reviewed, and teach OIN readers how to replicate those results. After revisiting some of the past reviews, I discovered that you can make money by following the strategies and directions of this column. I also discovered that some of the best stock pickers on Wall Street are right here at OIN. Yes, you heard that right! OIN readers are among the best and brightest traders I know of. I also have to reiterate that this column is a teaching tool to help you become a better trader and/or investor. The goal of my reviews are not to pick entry and exit points, nor tell you which stocks to buy or sell. My job is to help OIN readers become better traders. As many of you know, at heart, I'm a devoted fly fisherman. And you know what they say about teaching a man or woman how to fish. In the next few months I'll search through the vaults of OIN and revisit some of our past successes and failures. I'll also continue to review new stocks from our OIN readers. So keep sending in your requests to Contact Support. Please put the symbol in the subject line of the e-mail. ---------------------------- Silicon Storage Technology - SSTI How about it? - Linda Can you explain why SSTI reported 21 cents above the whisper number of 50 cents and did not budge and its competitor Sandisk beat estimates by 3 cents and the stock flew. I believe SSTI's revenue growth sequential, year to year and 5 year are astronomical and investors are not realizing this. Do you have any info that I don't know about because this is a leader and its not getting treated like one. - Anonymous The market is always looking forward. Wall Street generally discounts stock prices anywhere from 3 to 9 months into the future. In SSTI's case, the company pre-announced better-than- expected profits about three weeks before reporting its actual second quarter results. And like you mentioned, SSTI's numbers absolutely blew past estimates. But, its phenomenal profits were already factored into the stock price. Keep in mind that SSTI's 52-week low is $7. Remember, when a company reports its quarterly results, they are looking backward. While Wall Street is looking forward. I would imagine that SSTI's management gave some questionable guidance to analysts on their conference call on July 18th. Although I didn't listen to the call, I would bet that analysts left the meeting with some unanswered questions about SSTI's future. So, the combination of the post- earnings profit taking, the Salomon Smith Barney downgrade of the entire semi sector, and the poor guidance given by SSTI's management sent the stock plummeting. The Semiconductor sector is going through one of its typical cyclical waves right now. Some analysts fret that demand for chips will slow in the coming year. But, according to other analysts and industry executives, the chip business shows no signs of slowing. SSTI's CEO said, "Demand for our products continues to outstrip our capability to supply." That's a good thing! If SSTI sustains its earnings momentum the recent sell- off might prove to be a good buy. The company's SuperFlash technology is cheap and highly flexible. The demand for flash memory should continue to increase as MP3 players and digital cameras make their way into consumers' hands. Furthermore, SSTI has an impressive pipeline; the company successfully developed nearly 50 new products so far this year. I agree that SSTI is one of the leaders in the flash memory market. But, it would probably be wise to wait for a clearer future before jumping in. The poor action in the Semi sector Wednesday didn't look very good. It's better to buy on the way up than on the way down! ---------------------------- Biomet - BMET What kind of trend can you see here? The stock is splitting three for two. Can there be near-term weakness? - Jose' BMET is a medical device maker. BMET operates in five distinct business segments, chief of which is the reconstructive devices division. The company has managed to grow sales at an amazing 35% annually since 1983. Yet, despite the strong sales growth, BMET has a volatile earnings history. Profits tapered off last year amid pricing pressures. However, the market for medical devices appears to be firming, proof of which can be seen in BMET's past two quarters. The company recently recorded its second-quarter results and posted a 20% increase in earnings from the year prior. Strong sales growth in its reconstructive products boosted EPS one penny past estimates and carried the stock to a new 52-week high. The stock is fairly expensive on a relative P/E basis, but might be worth a look for a long-term investor. The company has been funneling cash into research and development, which has produced several new high-growth products. One such product is the new metal-on-metal hip-replacement device. BMET is one of two companies that make such a device. BMET should continue to see increased sales for its medical devices over the next decade noting the dramatic shift in U.S. demographics. In the near-term you have the 3-for-2 split to look forward to. The payable date for the split is August 8th. BMET might make a run into the split, but other than that, I don't see a major catalyst to carry the stock higher in the near-term. The stock has been holding up relatively well despite the correction in the broader market last spring, which is mainly due to its improving fundamentals. If you've got some patience and a long-time horizon, BMET might be worth considering. ---------------------------- Netro - NTRO Please give me (us) your thoughts on NTRO. Thanks. - Bob NTRO is a lesser-known player in the broadband wireless arena. NTRO targets small and medium-sized businesses in the Metropolitan Access markets. As some of you might know, there is a gap between high-speed metropolitan Internet networks and some smaller corporate networks. NTRO supplies wireless networking equipment to telecom service providers who in turn supply data and voice services to smaller customers. Most cities are still without the necessary infrastructure for all businesses to gain high-speed Internet access. NTRO has solved that problem by developing a wireless broadband technology. The company has established key relationships with some of the biggest telecom names. NTRO has aligned with Cisco, Nokia, Lucent, and Motorola among others. The various marketing and licensing agreements that NTRO shares with the big boys has positioned the company for success. Furthermore, about one month ago, rumors surfaced that Nokia was in talks to acquire NTRO. Both companies denied the rumors, but there's nothing like a little takeover talk to stoke momentum. NTRO reported revenues of $15.5 mln last week when the company announced its second-quarter results. That was a 385% increase in top-line growth from a year ago! Despite the explosion in sales NTRO is still without profits. I would say that is one of the biggest risks with the stock right now. However, the company is expected to burst into profitability next year, with current estimates running near 27 cents per share. Noting the company's upside surprise in revenues last week, profitability might come sooner than analysts think. The company is expected to lose 3 cents in its third quarter; an upside earnings surprise might really get the stock moving. The stock recouped some of its losses after the Tech wreak earlier this year with help from its impressive relative strength. NTRO will be a good stock to put on the radar list going into the fall, assuming we get the seasonal/presidential election rally. Although the company is not yet making money, the rate at which NTRO is growing revenues should catch your attention. The stock will be subject to fluctuations in the NASDAQ, which presents some risk. But, with backing from the likes of Cisco and Nokia, NTRO should be a winner over the next several years. ---------------------------- Newport - NEWP What do you think of NEWP? It's volume is increasing but it looks too high to me. Have you any thought? I have been watching this stock. It looks too good to be true. Thanks. - Marie NEWP is one of those fantastic stocks benefiting from the current boom in the fiber optic market. The company makes products that are used by manufactures to test optical communications systems, semiconductors, and a host of other electrical devices. The company operates an extensive online catalog which boasts over 10,000 products; marketed to the engineering and scientific communities. NEWP is deriving increasingly larger amounts of its revenues from the sale of fiber optic testing equipment to the likes of JDSU and SDLI. Revenues from fiber optic-related testing equipment amounted to 24% of NEWP's total sales last year. That number climbed to 37% in the first quarter of this year. NEWP's increased sales of optical testing equipment helped the company to handily surpass analysts' estimates in its last two quarters, and has been the primary driver of the stock price. Additionally, the ongoing consolidation in the fiber optic arena has added to NEWP's momentum. With a relatively small market cap around $3 bln, NEWP could easily be bought by a larger firm such as GLW. The possibility of a takeover is merely speculation. You are right on about the rising volume Marie. The heavy trade is a sure sign that institutions have been accumulating the stock. You are also correct about NEWP's lofty levels. Earnings are expected to increase next year by roughly 48%. That would make NEWP's PEG around 2.4, relative to next year's growth. That's expensive! I don't think that the fiber optic boom is going to be a fad like some of the Internet stocks were. Most of the companies in the fiber optic arena, including NEWP, have sound business models and positive cash flow. They're just so darn expensive! I'd like to see some of the stocks like NEWP consolidate for a couple of months, and let earnings catch up with their multiples. A few months of consolidation would be a lot easier on investors rather than a complete crash in the sector. Now, I'm not calling a top in the fiber optic group, I'm just saying valuations matter! The recent run-up in NEWP makes it hard to look for a good entry. The risk/reward ratio seems high at current levels, but a momentum is a powerful thing and could carry NEWP a lot higher. ---------------------------- Check Point Software Technologies - CHKP After declaring excellent earnings is on the march up again. What is your opinion, this march up would hold during summer doldrums? Regards. - Sunil CHKP is a frequent guest of the OIN call list and a leader in the Internet infrastructure market. The company pioneered a technology it calls the Secure Virtual Network (SVN). The SVN enables secure and reliable Internet communications between businesses and consumers. CHKP targets the virtual private networks (VPN) market with its SVN technology. VPNs are essentially networks that connect the Internet with various corporate intranets to enable e-Business capabilities. CHKP controls a commanding 52% of the VPN market. That market dominance has helped CHKP to grow earnings at a break-neck pace. EPS is expected to grow by 57% by year's end, and 38% in 2001. Now for the bad news. The real risk I see with CHKP at its current levels is that the stock is so expensive. Yes, the company has accelerating earnings. And yes, the Internet software sector is still booming. But, for how long will investors support these high valuations? I don't want to sound repetitive, but at the same time, I don't want OIN readers to lose money. Although a long-term investor might want to wait for a better entry into CHKP, that doesn't mean we can't take money by trading the stock. And, to answer your question Sunil, CHKP will probably rally for the remainder of the summer if the NASDAQ extends its rally. Otherwise, if the NASDAQ rolls over I bet CHKP will follow it down. The CHKP chart is remarkably similar to the pattern the NASDAQ traced over the last six months. I find the correlation almost identical. With that said, CHKP is a good way to play the broader direction of the Tech sector. The stock should be a long-term winner with its commanding market share and solid earnings growth. It just seems a little rich at its current levels. ---------------------------- Power One - PWER We reviewed PWER back near the beginning of June. The stock had held up incredibly well during the spring bear market, which suggested it might be a leader once a new bull emerged. True to form, PWER surged higher as the markets recovered in June. Back then I wrote, "Our current market wants fundamentals in a stock and that means earnings, earnings, earnings!" Since writing that review PWER delivered yet another quarter of estimate-beating earnings. The stock was trading at a modest valuation relative to its future earnings growth in June, and continues to trade at a discount relative to the S&P 500. Volume was increasing when we discussed the stock as institutions were loading up. The final ingredient that lead to PWER's surge higher was the almighty momentum. The recipe for PWER's success was increasing earnings, a relatively low multiple which was ripe for expansion, support from institutions, and a little price momentum. Once the market regained its footing, the stars aligned, and PWER surged higher. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. *********** OPTIONS 101 *********** Full Disclosure By David Popper Last week I mentioned that I have concentrated on 20 stocks and traded these exclusively. Many of you asked me which 20 stocks I traded. I certainly did not mind sharing this information, but I was concerned that people may put too much trust in my selections. You see, I am only a part time trader. I still have a lot to learn. Throughout my learning process, I have tried many strategies trying to find one that fit my style. The process was exciting. I had many highs and lows. Finally I had to honestly evaluate my goals. My goals were consistency, not excitement. Many strategies, which involve taking potentially lucrative positions (buying options) are exciting, but have to be closely monitored. These positions allowed me to win big or lose big. They were certainly exciting, but they were not consistent. Murphy seemed in control. Therefore I continued my search for consistency. Eventually I began to use 1/2 of my account to buy top stocks and write covered calls. I would usually get about 8-10% premium. I would leave 1/2 of my account in cash waiting to buy the dips. This would allow me to profit on downturns as well as upturns. On most, but not all occasions, I would achieve somewhere between a 5-10% return each month. Of course that return isn’t achieved each month. Like many of you, I suffered in March and April. My suffering was hedged however because I had a sizable amount in cash in reserve. Later in the process I learned that the strategy is only as good as my stock selections and technical analysis. The natural question which emerged was how do I find stocks which fit my strategy. I began looking at the OIN selections, the IBD comments, and read literally thousands of news articles, message boards, comments etc. Finally I began to see a consistency in many of the selections. The very best stocks were leaders in the fastest growing sectors of the economy. They were achieving incredible growth each quarter. Most of these stocks were also highly volatile because the stock price is incredibly rich by any traditional standard. These stocks are priced based on speculation of what they can become. When analysts are optimistic, they see the glass as half full and the stock rises. When analysts mention the potential pitfalls, the stocks temporarily tank. In short, the emotional swings keep these stocks volatile. Volatility is dangerous for the option buyer if his purchases aren’t precise. Volatility can be a boon to the option seller because volatility increases the option’s premium. If the option seller trades at a technically accurate time, the trade becomes safer and the profits increase. So, how did I find these stocks? I began to use one fundamental measure and one technical measure. The fundamental measure is EPS (earnings per share. In IBD , each company’s EPS is listed. IBD measures the EPS by comparing a company’s earnings in the two most recent quarters and comparing them to the same two quarters from the year earlier. Then the earnings growth rate for the past 5, 4 and 3 years are evaluated. The results are compared to all other stocks and are rated on a scale of 1 to 99, with 99 being the best. For example if a stock is rated with a 90EPS rating, it outperformed 90% of all other companies in earnings growth. I insist that a stock have at least an 80 EPS. The technical measure that I use is relative strength. IBD measures the stock’s price change over the past 12 months and once again compares it with the universe of stocks. If a stock has a 90% RS then it has outperformed 90% of the stocks over the last year. Once again , I insist that a stock have an RS rating of 80 %. Sure, I will miss out on some huge winners but those stocks with high EPS and RS rating usually bounce back after a correction. Some high performers with low EPS or RS do not- remember CMRC? So here they are, complete with their EPS and RS rating in no particular order: Stock EPS RS Stock EPS RS JDSU 97 99 INTC 94 87 PMCS 96 97 NT 98 95 CHKP 99 98 EMC 98 93 NTAP 99 99 CSCO 98 86 TQNT 98 95 MERQ 99 95 BRCM 84 96 AMGN 84 89 SUNW 98 91 QLGC 99 84 VRTS 99 95 CMVT 98 89 SEBL 98 97 SFA 91 96 ORCL 99 95 WPI 85 88 Remember, all of these except WPI are tech and are dangerous. The huge swings can leave you underwater temporarily. The danger however is what brings in the premium. The high EPS and RS brings some security. Good luck but please get to know the companies you trade. Contact Support ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** ATON - Alteon Websystems $151.50 -4.25 (+7.88 this week) In the race for faster communication, Alteon makes products to speed up the servers that feed data into networks and Web sites. The company offers Gigabit Ethernet server switches, and the controlling operating system to manage server "farms", or servers that handle large amounts of data. Alteon sells it gear to manufacturers, service providers, and content publishers. Most Recent Write-Up Not your typical post-earnings sell-off poster child. ATON has been powering higher after absolutely blowing away consensus estimates for its fiscal fourth quarter results, which it reported late last week. ATON surpassed analysts' profit predictions by a stunning 466%! Who said the Net was dead? ATON surged into profitability a full three-quarters ahead of schedule. The company's impressive results stem from the ever- increasing demand for its products such as Web switches, adapters, and traffic management software for Internet data centers. In conjunction with the stellar profit report, ATON said it had acquired privately-held Pharsalia Technologies for $221 mln in stock. Pharsalia will bring its innovative content delivery products to ATON to further address Web switching and Web hosting needs. Along with the upside profit surprise, analysts applauded the acquisition. Moreover, just before announcing blowout earnings and the acquisition, ATON revealed its new Webworking Services for next-generation e-Business infrastructure. Many on Wall Street feel that ATON is emerging as a franchise player in the Internet infrastructure arena, and have mentioned the company in the same breath with such Tech heavyweights as Juniper and Redback. The positive outlook, fueled by spectacular earnings has pushed ATON to record highs. Additionally, for a little kicker, the stock is trading well into split territory with plenty of shares to authorize a 2-for-1. ATON pulled back Tuesday on moderate profit taking. The stock bounced off support at $150 to finish the day strongly. Look for entry Wednesday morning if ATON's rally resumes and the stock clears resistance at $160, its 52-week high. A bounce off $150 might provide an entry on early morning weakness. Comments After trading down hard with the markets in the morning, ATON bounced off strong support at $140 and rallied for a marginal loss on the day. The fact that ATON closed back above $150 is encouraging for our new play. The entry point today looked good, but we need the Nasdaq to rally in order for the momentum to return. Check the overall sentiment to make sure the Nasdaq bounce is in effect before jumping in on any new plays. Support is at $140 with resistance at $160. BUY CALL AUG-145*UAO-HV OI= 30 at $19.50 SL=15.00 BUY CALL AUG-150 UAO-HW OI=182 at $16.88 SL=12.00 BUY CALL AUG-155 UVY-HK OI= 3 at $14.75 SL=10.25 BUY CALL SEP-155 UVY-IK OI=753 at $22.88 SL=17.00 BUY CALL SEP-160 UVY-IL OI= 52 at $20.13 SL=15.00 SELL PUT AUG-140 UAO-TU OI= 48 at $10.13 SL=12.75 (See risks of selling puts in play legend) Picked on July 25th at $155.38 P/E = N/A Change since picked -4.25 52-week high=$160.56 Analysts Ratings 5-3-0-0-0 52-week low =$ 41.00 Last earnings 06/00 est= 0.03 actual= 0.16 Next earnings 08-18 est= 0.05 versus= -0.45 Average Daily Volume = 946 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** By Ray Cummins and Mark Wnetrzak It's a jungle out there and hard to tell what's lurking in the bush. Hold your breathe - the Employment Cost Index is next! The market endured a precipitous drop today as industrial stocks fell on concerns over future revenues. The technology index was also battered in early trading amid a slump in semiconductor and Internet stocks. Investors have been extremely cautious in the past few sessions and today they responded negatively to earnings reports released by LSI Logic (LSI) and Ebay (EBAY). Shares of Amazon (AMZN) also came under pressure, following a downgrade by Lehman Brothers. The only bright spot for the Nasdaq Composite was the biotechnology sector, which recovered late in the day, helping the index rebound from earlier lows. In the broad market, drug, retail, oil service and transportation issues edged higher while financial, utility and paper stocks retreated. Analysts say the bearish activity is all part of the public's reaction to an eventual slowdown in the U.S. economy and most experts believe that future rallies will be limited until investors become more confident on revenue growth going forward. One of the most well known gurus, Goldman Sach's chief strategist Abby Joseph Cohen, commented that share price action during the remainder of 2000 is likely to be less exciting, and more rewarding, than the first half of the year. After experiencing the carnage of the last few sessions, I sincerely hope she is correct! Summary of Previous Picks: Note - July Expiry As of Friday's Close Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ENZ JUL 50 46.25 69.94 $3.75 6.7% ABSC JUL 55 50.75 82.06 $4.25 5.8% SDLI JUL 210 193.81 442.31 $16.19 5.8% NEWP JUL 65 60.87 119.00 $4.13 5.6% ISSX JUL 80 76.81 85.69 $3.19 5.5% HGSI JUL 90 83.38 162.50 $6.62 5.5% AETH JUL 180 170.88 183.00 $9.12 5.4% INCY JUL 75 73.06 97.38 $1.94 5.0% IWOV JUL 70 66.38 69.25 $2.87 4.4% INSP JUL 50 48.13 48.06 -$0.07 0.0% July Positions Closed Early: Echelon (ELON) GMST AUG 60 56.06 62.88 $3.94 7.1% Consolidating VSTR AUG 135 127.25 138.94 $7.75 6.2% What a Mover! ITWO AUG 115 109.00 130.44 $6.00 5.6% NTAP AUG 90 85.44 101.94 $4.56 5.4% VRTA AUG 55 52.18 76.13 $2.82 4.4% ARTG AUG 100 95.25 108.81 $4.75 4.1% Watch Closely AWRE AUG 50 47.00 49.00 $2.00 3.5% Looking Weak Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ENZ JUL 45 42.50 69.94 $2.50 14.0% INSP JUL 48 46.50 48.06 $1.00 13.4% INCY JUL 70 68.81 97.38 $1.19 11.2% AKAM JUL 95 93.75 117.00 $1.25 8.8% TECH JUL 95 92.94 116.13 $2.06 7.9% MERQ JUL 73 71.31 99.13 $1.19 7.8% NEWP JUL 55 53.31 119.00 $1.69 7.7% IWOV JUL 45 44.53 69.25 $0.47 7.3% Adj 2-1 Split BRCM JUL 145 142.87 229.94 $2.13 7.1% AFFX JUL 140 137.12 193.56 $2.88 7.0% PDLI JUL 105 102.12 165.00 $2.88 6.9% ABSC JUL 45 43.44 82.06 $1.56 6.9% BRCD JUL 105 101.75 199.88 $3.25 6.8% PDLI JUL 125 122.37 165.00 $2.63 6.8% ISSX JUL 70 69.00 85.69 $1.00 6.7% CIEN JUL 130 128.31 155.88 $1.69 6.5% HGSI JUL 75 72.62 162.50 $2.38 6.4% TIBX JUL 80 78.94 112.00 $1.06 6.4% RBAK JUL 78 75.12 139.38 $2.38 6.4% IWOV JUL 60 58.81 69.25 $1.19 6.3% SDLI JUL 170 164.87 442.31 $5.13 6.3% AETH JUL 150 147.25 183.00 $2.75 6.2% MLNM JUL 80 77.81 112.75 $2.19 6.0% RBAK JUL 115 113.50 139.38 $1.50 5.9% IDPH JUL 95 93.87 119.31 $1.13 5.6% GLW JUL 200 195.87 283.25 $4.13 5.5% NVDA JUL 55 54.03 69.69 $0.97 5.4% Adj 2-1 Split CHKP JUL 145 142.00 251.00 $3.00 5.3% SDLI JUL 215 213.50 442.31 $1.50 5.0% July Positions Closed Early: Echelon (ELON) NTAP AUG 80 78.12 101.94 $1.88 8.7% CLRN AUG 45 43.50 78.44 $1.50 8.5% VRTA AUG 50 48.38 76.13 $1.62 8.4% AWRE AUG 45 43.75 49.00 $1.25 8.0% Watch Closely GMST AUG 50 48.87 62.88 $1.13 7.7% Consolidating TIBX AUG 90 87.63 102.34 $2.37 7.5% At 50 dma MACR AUG 75 73.32 86.00 $1.68 6.2% At 150 dma? ITWO AUG 95 93.31 130.44 $1.69 6.1% ARTG AUG 88 85.62 108.81 $1.88 5.9% Still Room MERQ AUG 85 83.32 97.94 $1.68 5.8% SAPE AUG 85 83.56 125.19 $1.44 5.7% VSTR AUG 110 108.31 138.94 $1.69 5.6% What a Mover! MERQ AUG 80 78.87 97.94 $1.13 5.2% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return AMD JUL 95 96.19 80.13 $1.19 13.9% SSTI JUL 125 126.38 81.00 $1.38 10.7% DITC JUL 110 110.94 83.25 $0.94 10.1% RFMD JUL 150 151.75 75.38 $1.75 7.8% Positions Covered: Broadcom (BRCM), Applied Micro (AMCC), SDL INC. (SDLI) New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** AETH - Aether Systems $181.13 *** Basing Pattern? *** Aether Systems provides wireless data services, systems and software enabling people to use handheld devices for mobile data communications and real-time transactions. Aether's strategy initially focused on developing services for the financial services sector but through recent acquisitions they have expanded into the healthcare, transportation logistics, sales force automation, and delivery industries. This week, Aether reported strong growth for the first six months of 2000, increasing revenue growth to $10.8 million, compared to only $447,000 for the same time period last year. In the second quarter, Aether strove to maintain its position in the industry by entering into partnerships and launching business ventures with several corporations. Among these companies, Visa, First Data, Reuters, and Research In Motion were the top investors in Aether's technology. Aether further expanded its role in the wireless environment through it's ScoutSync becoming the Palm OS standard, and through Schwab's launch of its wireless investing service, PocketBroker; a unique system developed, deployed and supported by Aether. A strategic second quarter acquisition by Aether was the purchase of wireless e-commerce leader, NetSearch. NetSearch's customers include automobile giants Lexus, Toyota, Nissan, and Lincoln-Mercury. Aether is one of the premier companies in the high profile group of communication companies and a number of analysts are bullish on its long-term outlook. The recent trading-range bottom near $160 defines this position as a relatively safe entry into the volatile networking sector. Our position offers a low risk cost basis with a reasonable expectation of profit. AETH - Aether Systems $181.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 155 HEX HK 13 31.88 149.25 5.1% *** Sell Call AUG 160 HEX HL 90 28.25 152.88 6.2% Sell Put AUG 135 HEX TG 56 1.81 133.19 6.3% *** Sell Put AUG 140 HEX TH 87 2.25 137.75 7.7% Sell Put AUG 145 HEX TI 53 3.13 141.88 10.5% Chart = ****** AMCC - Advanced Micro Circuits $162.88 *** Own This One! *** Applied Micro Circuits designs, develops, manufactures and markets high-performance, high-bandwidth silicon solutions for the world's communications infrastructure. Their products are designed to respond to the growing demand for high-speed networking applications. Shares of Applied Micro Circuits rose by almost $30 on July 13 after the company reported a 250% increase in its earnings per share for the first quarter from a year ago. Its performance soundly beat (by $0.04 or nearly 25%) the expectations of most analysts polled by First Call. Net revenue was $74.2 million, up from $31.6 million a year ago and the company credited strong sales in the first quarter for the healthy profits, as well as improved operating margins. Since the announcement, shares of AMCC have continued to climb steeply, closing yesterday at an all-time high near $171. Today’s activity was simply a classic retrenchment as some investors took advantage of the rally to lock-in profits. From a technical viewpoint, the issue has excellent support near our cost basis and the over-priced option premiums will allow us to open a new position at a favorable entry point. AMCC - Advanced Micro Circuits $162.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 120 AZV TD 384 1.69 118.31 6.5% *** Sell Put AUG 125 AZV TE 517 2.19 122.81 8.3% Sell Put AUG 130 AZV TF 434 3.00 127.00 11.2% Sell Put AUG 135 AZV TG 509 3.88 131.12 12.5% Chart = ****** CALP - Caliper Technologies $63.22 *** Favorable Judgment! *** Caliper Technologies is engaged in the lab-on-a-chip technologies. They believe their LabChip systems can assemble the power and reduce the size of entire laboratories filled with equipment and people. Their high throughput systems perform experiments in a serial, continuous flow fashion at a rate of 5,000 to 10,000 experiments per channel per day. Shares of Caliper Technologies rallied last week after a federal court accepted Caliper's interpretation of key terms in a patent suit filed by Aclara. The court ruled in favor of Caliper on the meaning of the most critical terms of Aclara's patent claims and based on the ruling, the company expects to file a motion for summary judgment in an effort to bring an early resolution to patent suit. The companies are currently involved in a number of lawsuits. Aclara initiated this patent suit in April 1999, and Caliper has filed two suits against Aclara, one in March of 1999 alleging trade secret misappropriation and another this year alleging infringement of five patents. Technology patents are a major portion of the company's value and they have added substantially to their portfolio with four new additional patents this quarter. These patents expand the breadth and utility of chips for their personal laboratory system and high throughput systems, cover manufacturing processes as well as novel chip designs and architecture. Currently, the company has 59 U.S. patents issued, another 16 allowed, and 150 in the pipeline. Based on the recent bullish activity in the issue, investors must believe the company is one track to deliver future profitability and our position offers an excellent reward potential at the risk of owning this unique issue at a favorable cost basis. CALP - Caliper Technologies $63.22 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 50 DQQ HJ 152 15.38 47.84 6.0% *** Sell Call AUG 55 DQQ HK 28 12.00 51.22 9.8% Sell Put AUG 45 DQQ TI 103 1.13 43.88 10.8% *** Sell Put AUG 50 DQQ TJ 91 2.19 47.81 19.5% Sell Put AUG 55 DQQ TK 26 3.88 51.13 24.5% Chart = ****** VRTA - Virata $76.13 *** Own This One! *** Virata sells communications processors combined with integrated software modules to manufacturers of equipment utilizing digital subscriber line (DSL) technologies. These integrated product solutions enable its customers to develop a diverse range of DSL equipment, including modems, gateways and routers targeted at the voice and high-speed data network access market. Virata focuses its resources on the development and marketing of its products, while outsourcing the actual manufacturing of its semiconductors. On Tuesday, Virata reported record results for its fiscal first quarter and said it plans to acquire Agranat Systems, to provide the company with access to critical Web technologies and network management software. Total revenues for the quarter were $27.7 million, an increase of 130% over the prior quarter and a 939% increase over the same quarter one year ago. During the quarter, the company continued to secure major contracts with customers worldwide and their substantial growth in revenue and earnings was driven by a significant increase in communications processor and software shipments to this record-high customer base. Virata is well positioned with a portfolio of integrated semiconductor and software solutions that will enable them to maintain further growth in the DSL and broadband wireless markets. The company has strengthened its portfolio through the acquisitions of D2 Technologies and Inverness Systems and proposed acquisitions of Excess Bandwidth and Agranat Systems. In short, they are aptly prepared to stay ahead of the competition in terms of product range, price, functionality and time-to-market. VRTA - Virata $76.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put AUG 55 UFA TK 71 1.19 53.81 9.6% *** Sell Put AUG 60 UFA TL 269 2.06 57.94 15.8% Sell Put AUG 65 UFA TM 127 3.50 61.50 20.3% Chart = *************** BEARISH PLAYS - Naked Calls *************** HWP - Hewlett Packard $110.00 *** Bearish Technicals! *** Hewlett-Packard Company is a global provider of computing and imaging solutions and services for business and the home. HWP's major businesses include Imaging and Printing Systems, Computing Systems and Information Technology Services. Their Imaging and Printing Systems provides laser and inkjet printers, copiers, scanners, all-in-one devices, personal color copiers and faxes, digital senders, wide- and large-format printers, print servers, network-management software, networking solutions, digital photography products, imaging and printing supplies, imaging and software solutions, and related professional and other consulting services. Computing Systems provides computing systems for the enterprise, commercial and consumer markets. HWP's IT Services provides consulting, education, design and installation services, ongoing support and maintenance, proactive services like mission critical support, outsourcing and utility computing capabilities. The recent slump in retail personal computer sales has hurt a number of the industry's top companies including Hewlett Packard. Growth in shipments of personal computers in the second quarter has slowed to half what it was in the same period a year ago, which could signal a cooling off of sales growth in both U.S. and European markets. In addition, the U.S. market growth was well below the worldwide rate, with unit shipments expanding only 7.2% over the year-ago quarter. Hewlett-Packard has generally enjoyed strong sales of retail desktops in the United States and posted a 34% growth rate over the last year. However, one analyst noted that sales will decline unless the company offers consumers and businesses next-generation computers that are even more powerful and stylish than the systems that are currently on the market. Since the news of slowing demand became public, the company's share value has fallen substantially and based on the negative short-term outlook, we are going to pursue a bearish position with a conservative risk/reward perspective. HWP - Hewlett Packard $110.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 135 HWF HG 1788 4.50 139.50 22.5% Sell Call AUG 140 HWF HH 796 2.75 142.75 14.7% Sell Call AUG 145 HWF HI 617 1.81 146.81 10.1% Sell Call AUG 150 HWF HJ 1538 1.00 151.00 5.7% *** Chart = ****** MRVC - Mrv Communications $71.00 *** Earnings Are Due! *** MRV Communications has created several start-up companies and formed independent business units in the optical technology and nternet infrastructure area. Their core operations include optical networking and internet infrastructure products, primarily subscribers' management, and physical layer, switching and routing management systems in fiber optic metropolitan networks; and fiber optic components for the transmission of voice, video and data across enterprise, telecommunications and cable TV networks. The big news for Mrv Communications is that fiber optics firm Luminent has filed to raise up to $207 million in an initial public offering. Luminent (LUMN), a unit of MRV Communications, specializes in fiber optic components and subsystems such as laser, transmitters, receivers, and modulators for high-capacity data transmission. MRV plans to complete its divestiture of Luminent within six to 12 months after the IPO by distributing shares of Luminent common stock owned by MRV to the holders of MRV's common stock. While this may eventually be a boon for MRV's shareholders, the news failed to rally the parent stock in today's session. In addition, MRV is due to release quarterly earnings later in the week, and if past history is any indicator, the company rarely provides upside surprises. We will use the current consolidation period to benefit from overpriced option premiums with these relatively conservative, bearish positions. The probability of the share value reaching our sold strikes appears rather low but there is always the possibility of a recovery rally so monitor the position daily for changes in technical character. MRVC - Mrv Communications $71.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 85 RVY HQ 266 5.13 90.13 34.7% Sell Call AUG 90 RVY HR 248 4.13 94.13 29.8% Sell Call AUG 95 RVY HS 52 3.13 98.13 23.9% Sell Call AUG 100 RVY HT 124 2.44 102.44 19.4% *** Chart = ****** MUSE - Micromuse $140.38 *** Sector Slump? *** Micromuse develops, markets, and supports a family of scalable, and highly configurable software solutions that enable fault and Service-Level Management (SLM). Micromuse's Netcool product suite collects and consolidates high volumes of event information from network management environments into an active database that correlates the resulting data in real-time, and then rapidly distributes graphical views of the information to operators and administrators responsible for monitoring service levels. The Computer Software sector has been struggling recently and even the top companies such as Micromuse have been affected by the slump. A number of computer management software producers reported lower results this quarter and the analysts say the major factor in the decline was a drop in demand for mainframe software. The most recent quarters have confronted the group with many unforeseeable market factors that negatively impacted a majority of the independent software vendors. MUSE actually outperformed most competitors, exceeding the earnings-per-share estimates by $0.01. The company also has exceptional potential in the future and beyond the near-term consolidation, the issue should continue to increase in value. This play is simply based on the current price or trading range of the underlying issue and its recent technical history. The MUSE price trend reflects a negative divergence from a near-term moving average and the recent downward movement has endured lower highs and lower lows, on heavy selling pressure. With the recent failure at $185, a "double top" formation is in place and for now it appears the share value has little chance of reaching our sold positions. MUSE - Micromuse $140.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call AUG 185 UZQ HQ 46 2.13 187.13 9.3% Sell Call AUG 190 UZQ HR 259 1.75 191.75 7.8% Sell Call AUG 195 UZQ HS 0 1.31 196.31 5.9% *** Chart = **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! 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