An Advance for Advanced?

12/10/2004 12:00 am EST


Chris Johnson

Editor, The Winning Edge

Each week, the Forbes newsletter group features a "stock of the week". The latesta player in the semiconductor sector comes from Chris Johnson, director of quantitative analysis for Schaeffer's Investment Research. Here’s his review of Advanced Micro Devices.

"Johnson recommends buying shares of Advanced Micro Devices (AMD NYSE), the Sunnyvale, California, maker of semiconductors. For the nine months ended September 26, 2004, revenues at AMD increased 62% from the same period in 2003 to $3.74 billion, while the company swung from a loss of $317 million to net income of $121.1 million. Shares of AMD are up 38.2% in the past 12 months, but have more than doubled (up 116%) since hitting their 52-week low of $10.76 on September 8, 2004. Based on its recent close of $23.22, AMD trades for 44.7 times expected 2004 earnings of $0.52 per share, and 32.25 times consensus 2005 EPS of $0.72. AMD's market capitalization is $8.52 billion.

"’Years of fundamental work at AMD is beginning to yield results as the company is now emerging from Intel's shadow as a semiconductor powerhouse,’ says Johnson, who relies primarily on technical analysis and contrarian sentiment to make investment decisions for both options and their underlying securities. ‘Recent relative strength of AMD stands as proof that the company has become the relative strength leader of the semiconductor sector,’ notes Johnson, adding that the stock now trades ‘above its long-term moving averages.’ In terms of sentiment, Johnson, along with Bernie Schaeffer, regard pessimism on the part of investors toward a stock as a positive sign, and one that they currently see with AMD. ‘Investor sentiment is flashing signs of pessimism, which from our perspective is a positive as it signifies the potential for more sideline money to flow into the stock as those pessimistic investors shift to buyers,’ says Johnson.

"As evidence of investor pessimism, Johnson cites the current Schaeffer's Open Interest Ratio for AMD, now near its highest readings in the last year, which indicates that options investors have been favoring puts over calls. ‘The company's short interest remains near multi-year highs indicating that short sellers are also fairly bearish on their outlook for the stock,’ says Johnson. "Finally, the analyst community has not latched onto the recent strength in AMD as 65% of analysts covering the stock currently rank it a hold or lower," concludes Johnson. Johnson and Schaeffer regard most technology stocks as overpriced, but AMD is one of their bullish exceptions. ‘Given the strong fundamental and technical performance combined with negative sentiment, AMD appears to be one of the few tech issues truly worthy of more than a look for your portfolio,’ says Johnson."

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