In the Palm of Your Hand....

07/16/2004 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Jim Collins and Bernie Schaeffer share several common traits. Both use proprietary systems that include fundamental and technical analysis. Both have terrific long-term track records. And both are currently recommending the same stockpalmOne.

"palmOne (PLMO NASDAQ) develops and markets handheld devices," notes Jim Collins, editor of OTC Insight . "Historically, the company was organized into two operating segments. However, in October 2003, PalmSource (which licenses the Palm operating system) was spun out of the company, and palmOne is now a separate entity. palmOne sells the Tungsten and Zire PDA brands. To date, palmOne has shipped over 25 million Palm-branded devices. The traditional product is the Palm PDA organizer. PalmOne holds 60% share of the market and will likely build on its lead now that Sony has exited the market in all countries outside of Japan. In the Zire line, palmOne was the first company to break the $100 barrier for a Palm device, versus $200-$400 for competing devices. Targeted to the professional segment, palmOne also sells the Tungsten brand, with varying features such as Bluetooth technology, faster processors, and WiFi connectivity.

"In our opinion, the smartphone segment is the growth area for the company. Currently, the firm sells the Treo 600, which was launched in October 2003 and is touted as the best smartphone on the market. Palm’s Treo 600 sells for $400, can be read in the sunlight, has a camera and runs 20,000 applications, which were written for the Palm operating system. The growth of Treo 600 has been very strong and this growth is expected to continue. Overall, the market for smartphones is expected to grow at an 86% annual rate through 2007. For the quarter ended May 31, palmOne reported earnings of $0.32 per share, which was $0.62 better than the 30 cent per share loss reported last year, representing 2097% growth year-over-year. Revenues increased 18% to $2.67 million. The stock is trading near a 52-week high of $34.77. The company received an A rating for accumulation and distribution, and has a relative strength ranking of 98."

Adds Bernie Schaeffer, editor of The Option Advisor , "palmOne’s product line ranges from affordable, entry-level handheld devices to pricier models that include features such as color displays. Its line tops out with wireless devices that can access e-mail and Internet content through the company's Palm.Net service. palmOne has yet to get investors to eat out of its hand, as traders continue to bet against the shares. The equity's open interest rates have charged higher since June option expiration. A rise in the stock's ratio indicates that investors have added puts at a faster rate than calls in the front three months of options. Short interest for PLMO sits at 6.5 million shares, which further suggests that the bears remain enamored of the stock. With a short-interest ratio of 4.3, the security could also benefit from short-covering support. It is interesting that this increase in pessimism follows the firm's recently reported stellar earnings report. The company posted a fourth-quarter profit of 27 cents per share, thumping the Street estimate of 13 cents per share and its 51-cent loss for the same period a year ago.

"What's more, PLMO boosted its 2005 revenue growth estimate. The shares gapped higher on the positive earnings news, sprinting off support at their ten-week trendline to reach a two-year high. Wall Street is similarly skeptical, with four of the six analysts following the firm rating it a "hold." Any upgrades or additional coverage could boost the shares higher. In addition, the equity continues to be panned by the financial media. A pullback should find support in the 24-25 area, the site of PLMO's ten-day moving average and early-April peak. An unwinding of the pessimism discussed above could add more muscle to PLMO's newfound strength. For options trades, we offer two strategies. Option buyers could buy the palmOne November 25 call. For more sophisticated options traders, we would also suggesting selling the palmOne August 25 put, which is another options strategy designed to benefit from strength in the underlying stock."

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