LSI and NVDA: Rational Selections

12/27/2002 12:00 am EST

Focus:

Jamie Dlugosch

Editor, The Rational Investor

"I am concerned about the market having moved too far too quickly; but overall, I am very comfortable that the markets will move higher in 2003," says editor Jamie Dlugosch, who has recently introduced an excellent new service called The Rational Investor. "With low interest rates, an improving economy, and attractive valuations, I am particularly optimistic regarding technology." Here's are two of his latest tech picks.

"Over the last three years, LSI Logic (LSI NYSE) has plummeted in price from a high of nearly $90 per share to a low of less than $4. Recently, the stock doubled in price as technology in general rallied. LSI engages in complex, high-performance integrated circuits and storage systems. While the company expected to report a loss of $0.12 at the end of 2002, LSI is expected to return to profitability in 2003 with average earnings estimates coming in at $0.26 per share. With book value of $6.73 as of 12/01, LSI trades for just over 1 times book value and seems to have weathered the storm of a weakening economy and collapsing demand for its products. Short-term valuation metrics do not factor in the incredible potential for exponential earnings growth as demand for LSI’s products varies greatly. With economic conditions improving around the world, it would seem reasonable to expect earnings surprises on the upside as time goes by. Our target is $30 per share. Buy up to $15.

"Often times, patient investors will be rewarded by buying shares when things seem to be bleakest. NVidia (NVDA NASDAQ) reported a loss in the third quarter and while revenues increased, the company was providing guidance of flat growth for the fourth quarter. With the semiconductor industry as a whole near a three-year cycle low, I believe NVDA is worthy of consideration as improving economic conditions bode well for future prospects. NVDA is the global leader in advanced graphic processing technology for mainstream platforms. Although analysts are expecting profits to drop to $0.59 per share in 2003, I see the potential for a positive earnings surprise. Even after doubling in price from its October low, NVDA is trading for just 29 times earnings. Any increases in performance in 2003 combined with future growth, make NVDA shares attractive from a valuation standpoint. A series of negative earnings surprises and a slowing economy caused NVDA to decline in price from and early 2002 high of $70. Buy up to $20."

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