The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

24 April 2006

Rack 'em up!

I had hoped this post would upload before today's market opening; alas, it has not. (And that is after several hours of trying!) -- David

As the market moves forward into its seasonally weak period (mid-April into mid-October), I thought I would share several of the opportunities that top my hit parade. Some of these I own already, others I wait on for better, more opportune moments to purchase. Price declines do not, in and of themselves, frighten me away because I expect, even embrace, volatility. In fact, volatility encourages me -- so long as it remains within a well-defined and correctly identified intermediate term area pattern.

Most of these companies below already will be familiar; my favor does not change based merely on price oscillations. Great investments endure for more than a day or two, even for more than a season or two.

Apple Computer/AAPL: Continues to build an intermediate term base. Expect short term oscillations to occur within the pattern, and profit from them, either by trading short term or accumulating your long term investment during the periodic bouts of short term weakness. The low of the pattern at ~$60-57 should stem any decline.
Advanced Micro Devices/AMD: Likely now nears the low of its intermediate term base at ~$30. Thus, there remains less price decline albeit plenty of additional time to lapse before the long term up trend resumes.
Google/GOOG: What can I say? The bears simply lack historical perspective. Their loss.
Intuitive Surgical/ISRG: Remains within its intermediate term base. Will buy more on a test of the mid- to low-90s.

Marvell Semiconductor/MRVL: Remains within its intermediate term base. A breach of ~$53 changes that picture. Also within its intermediate term base, the low of which should prove to be ~$32-30. Obviously, it is near that level now.

SanDisk/SNDK: Yes, SNDK too is within its intermediate term base. The low of that pattern (~$52) should stem any deeper price declines.
Starbucks/SBUX: Its powerful long term up trend re-exerted its primacy about 6 months ago. Do you recall my posts from 7 and 8 months back exhorting you to buy the shares at the then steal of ~$23?

(There are, of course, other potentially excellent investments. Did I neglect to update any for which you are interested? Please post your questions as a reply, and I will offer my comments in response.)

Do you detect a pattern? Many of these possible opportunities remain within their individual intermediate term bases. IF the market hits its seasonal bout of weakness, prices of the current leaders (extended in price, time, and trend) will decline, sometimes suddenly so. Seemingly without warning. But the patterns for such episodes of "sudden failure" are building now. Pay attention to the subtle clues broadcast to all! Meanwhile, those stocks already within their intermediate term bases will decline little, if at all. (Just the typical oscillations, as the area pattern builds to completion.) So, if you desire long term investments but with lessened risk as I do, seek (and purchase) those stocks building intermediate term bases but within a long term uptrend.

As investors, we choose our opportunities. There is no one right way to achieve investing success; there are, in fact, a multitude of ways. My path is only one way. I seek my opportunities from volume patterns: the greater the average daily volume, and the more interest displayed (especially from institutional investors), then the more interest from me. I suffer no ego problem with buying something for which other investors show a clear preference. Does finding an investment that noone has ever before heard of somehow speak to my intelligence? I think not; moreover, I no longer have anything to prove to others, leave alone myself. (I have enough problems as it is!)

So sustained volume in a stock catches my eye, as do green eyes and blond hair when I regard women. Go figure. Obviously, I make the assumption that investors, but especially institutional investors, have done their due diligence. And it is the nature of that assumption that causes me to favor this approach -- I might be smart (okay, let's pretend) and think my intelligence superior. The market, however, might think otherwise and sell down a position I own and favor, etc. I prefer to align my interests with the ongoing vote of the market. I seek the preponderance of the evidence, not the solitary, not even the singular.

From that beginning level of interest, I move to the next level: where in its continuum does the stock currently fall -- up, down, or sideways? And within what periodicity? That knowledge tells me whether I should hurry with my analysis, or have time to deliberate more. Then I investigate the company, its fundamentals, its opportunity. If the company and its stock make the grade, I add it to my monitor. And then wait for the moment germane to my needs within its current continuum.

Remember, this is my methodology; it is not necessarily appropriate for you. I do not run screens, I do not shop from among the new highs/lows list, etc. That analysis is the tail wagging the dog, or so I perceive. The same applies to fundamental analysis, which in some applications is akin to driving with the rear view mirror.

That said, here is a new opportunity. Let's pretend I am not previously familiar with it...

Rackable Systems/RACK is engaged in the development, sales and marketing of high-performance, low-power-consumption servers. In many ways servers are simply fancy computers. In fact in many small companies a dedicated PC is used as a server. Servers are used primarily for data storage and access and as front-end interfaces to high-speed internet connections. In this latter function they are usually referred to as web servers, but they also host more specialized services such as load-balancing, policing security protocols, application servers and a score of other functions. Servers are all computers, but, at least in a commercial setting, all computers are not servers. Servers have to carry heavy loads. They are often multi-processor boxes, containing massive amounts of memory and attached storage. They also will typically have a variety of specialized interfaces which allow them to connect to high-speed internet and storage networks.

In large businesses these servers are typically set in an air-conditioned room where large banks of servers are located, and into which typically high speed network and internet lines enter and connect. Who outside the company truly knows how many servers a company like Google might have, but it is most assuredly in the thousands, probably tens of thousands.

In such large configurations, putting generic PC’s into such rooms would not be at all practical. The two most notable problems are space and heat. A bank of 10,000 typical PC boxes would be a rat’s nest of wires and connections, would be rather large, and would generate a massive amount of heat which would need to be dissipated. To address the space problem racks were developed. Racks are nothing more than specialized shelving which hold slimmed-down powerful PC’s and other components. They also contain hardware for efficiently and neatly connecting the various wires that need to go between these servers and between the servers and the network.

Rackable servers are nothing more than very powerful thin PC’s that are made to fit directly onto a standard rack. While racks address the space problem efficiently, they only exacerbate the heat problem, as the dense packing of these servers provides less air to dissipate the tremendous heat that such high-powered machines generate.

Rackable Systems manufactures rackable servers which efficiently address this heat problem. Its proprietary system uses DC power rather than the typical AC power. They also externalize the rectifiers which convert the incoming AC power to DC power. As a result their servers are very heat-efficient. Without internal power supplies their servers generate less heat than conventional servers with the added benefit that the rectifiers can be located apart from the server racks and near cooling sources – so that the temperature around the servers is kept lower.

This not only results in lower costs for operating the data center (a very significant cost for a large center) but the cooler servers operate more efficiently and with less wear and tear. This increases reliability and reduces downtime from blown components. It also further addresses the space problem, since cooler servers can be located closer together allowing for more servers in a given space.

[click image to enlarge]

The first items I note: its average daily volume is ~835,000 shares and the shares have enjoyed a sustained and powerful uptrend for the past 6 months. So the stage is well set for my interest: the market likes it, I like the company and its opportunity, and I need only wait on an opportune moment to purchase. If I were to purchase this current setup, I would acknowledge the necessity for a meaningful correction, and thus enter the position on the appropriate signal only as a trade. Once I own the investment, I can manage it in accord with how its chart builds day by day. At this particular moment, however, the odds are 50/50 whether accelerated up trend line A will continue to prove relevant. If it does not hold (and I doubt it will), then look for tests of the 50-day simple moving average (sma), and, failing to hold there, trend line B. In each instance, the intermediate and long term up trends would remain in force. But should the price slice through crucial support at trend line B, then a deeper test toward, but not necessarily as deep as, the 200-day sma would follow soon thereafter.

Does price volatility mean the stock should not be purchased during weakness? If you are solely a price momentum trader, then no do not buy this opportunity, or any other, except on strength. (Never weakness, however.) But if you are a long term investor, then you prefer to purchase price weakness in the periodicities lesser than the one important to you. (Of course, the moment that particular picture changes, then you change your tactics.)

Never allow yourself or your portfolio to get caught behind the 8 ball. Rack 'em up!
-- David M Gordon The Deipnosophist

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