It is often very difficult for an investor to purchase a stock that has already appreciated considerably. Many investors typically wait for a pullback in price, and while doing so, they risk missing further upside potential in a stock they really would like to own from a long-term perspective.
Such investors may feel it is better to miss some upside, rather than purchase on hype and sustain a loss as a result of a price drop that may follow the hype. After all, consumers have become accustomed to sales and discounts. The investor side of a consumer is no different: Everyone wants a bargain.
One sector in particular that often seems to receive substantial hype is the technology sector. An alternative indicator to monitor an indication of decrease in hype, other than a substantial price drop, is the relative strength indicator (RSI). When such an indicator is coupled with strong fundamental development in the underlying stock, then it can possibly lead to a sustained move in the stock price in either direction.
Many use such an indicator to determine whether a stock has become overbought or oversold. RSI is a number between 0 and 100 (or sometimes expressed between 0 and 1), whereby an RSI under 25 typically signals a stock has become oversold, while an RSI over 75 signals a stock has become overbought.
Although excessive buying or excessive selling can cause a substantial move in the RSI in one direction or the other, it is also possible to see a drop or an increase in RSI without substantial price change in the underlying stock. Such phenomenon occurs whenever prices simply stabilize following a substantial move in the stock price in one direction or the other. After all, RSI is a momentum indicator. In such instances, the RSI may simply move back closer to its mid-level of 50, after having reached above 75 or below 25.
We have published two articles in the past, one of which examined excessively low RSIs, published on 8/21/2011, "a look at long term favorite stocks as the market tests previous lows", and the other one which examined an increase in such RSIs on 2/21/2012, "a second look at long term favorite stocks as the market spikes." In the first such article, we correctly anticipated that the markets would gain in the following months, while in the second article, we recognized high RSIs, and we indicated investors may use such an opportunity to book profits, although further upside may lay ahead.
With the recent sell-off in the market on 3/5/2012 and 3/6/2012, some favorite technology stocks have seen a drop in their 14-day RSI. Meanwhile, fundamental developments have remained supportive for most, hence indicating that this may present a good buying opportunity.
1. Skyworks Solutions Inc.
Skyworks Solutions Inc. (NASDAQ:SWKS) specializes in analog and mixed signal semiconductors. Its power amplifiers and front end solutions for cellular handsets have identified Skyworks as a possible supplier to Apple Inc. (NASDAQ:AAPL).
As a result, with a rise in Apple stock's fortunes, Skyworks has also benefited substantially. Its shares have increased from around $14 in mid December 2011, to as high as $28.16 on an intraday basis on 3/2/2012. Such price appreciation in excess of 100% in less than three months have caused SWKS 14-day RSI to move to over 90 on 3/2/2012. Following the recent market sell-off, the SWKS 14-day RSI is now near 58. SWKS RSI had not seen its RSI below this level since around 1/4/2012.
Skyworks Solutions Inc. Price Chart
Source: Yahoo Finance
From a fundamental perspective, Skyworks solutions could benefit from the growing smart phone market, currently led by Apple's iPhone. It is estimated that in the U.S. alone, the smart phone market now exceeds 100 million, users according to Comscore, with Apple capturing about 29.5% market share.
With its current stock price at $25.38, SWKS is still at a substantially higher stock price than it was in December 2011. However, as its current RSI is below 75, and is approaching 50, investors who are interested in such shares from a long-term perspective, and who believe SWKS may benefit further from a continuation in Apple's fortunes, may purchase SWKS at current price levels. However, it is important to note that from an RSI perspective SWKS is still not oversold.
2. Advanced Micro Devices
Advanced Micro Devices, Inc. Co. (NYSE:AMD) has benefited substantially from the recent appreciation in the semiconductor industry. During the past three months, AMD has appreciated from a low of $4.82 on December 19, 2011, to an intraday high price of $7.70 on 3/1/2012. Such appreciation of almost 60% has also resulted in an elevated 14-day RSI, which peaked at about 79 on 2/3/2012.
From a fundamental perspective, AMD is expected to continue growing as a result of the growing PC market estimated at about 350 million units. According to Forbes, AMD will benefit from growing emerging market demand, especially in China, where lower priced AMD based computers appeal to consumers with lower disposable incomes.
Following the most recent sell-off, AMD shares have dropped to close at $6.90 on 3/6/2012, with the 14-day RSI also dropping to around 45.3. AMD's RSI had been above this new RSI level since about 12/22/2011.
Once again, it is important to note that from an RSI perspective, AMD is still not oversold. However, as it is also not overbought. Investors who want to own AMD from a long term perspective based on its improving fundamentals may consider current price levels.
Advanced Micro Devices, Inc. Co. Price Chart
Source: Yahoo Finance
3. Intel Corporation
Intel Corporation (NASDAQ:INTC), as a large capitalization company, has already been identified in an article we published on 3/4/2012, "5 technology stocks that can get a boost from the economy," as a potential beneficiary of the resurging economy. Its shares have done quite well during the past three months, rising from an intraday low of about $23.05 on 12/19/2011, to an intraday high of $27.50 on 2/17/2012. A resurging U.S. economy, with improving employment numbers, will fundamentally increase demand for Intel-based computers, especially as businesses increase their IT budgets.
Intel's 14-day RSI reached 70 on 1/25/2012, and recently dropped to a low of 48.60 on 3/5/2012. Again, Intel's recent RSI level has not been seen since December 2011. Although Intel is also still not oversold from an RSI perspective, long term investors who also believe in Intel's ability to benefit from a resurging economy, may use such a pullback as a buying opportunity, as its current RSI clearly indicates it is not overbought.
Intel Corporation Price Chart
Source: Yahoo Finance
4. Qualcomm Incorporated
Qualcomm Incorporated (NASDAQ:QCOM) specializes in digital communication products and services. Again, Qualcomm has been a beneficiary of the recent improvement in the fortunes of Apple. During the past three months, Qualcomm stock had appreciated from an intraday low of $51.76 on 12/19/2011 to an intraday high of $63.81 on 2/24/2012.
Fundamentally, as in the case for Skyworks Solutions Inc., Qualcomm will also benefit from the growth in the smart phone market, as well as the increase in other mobile communications. Qualcomm is estimated to have 43.2% revenue share of the global cellular baseband processor market.
Qualcomm's 14-day RSI reached a high of about 79.3 on 2/23/2012, and as of its most recent close of $61.56 on 3/6/2012, its RSI currently stands at 52.3. Qualcomm had maintained a higher RSI than its current level since 12/29/2011. Once again, although Qualcomm's current RSI does not indicate that it is oversold, long term investors who believe in Qualcomm's ability to maintain its market share may chose to establish a position at these levels.
Qualcomm Incorporated Price Chart
Source: Yahoo Finance
5. Netflix Inc.
Netflix Inc. (NASDAQ:NFLX) is not really a technology company, but it is rather a media company. However, Netflix offers its services primarily through the Internet, and has expanded its services through the technologically advanced medium.
Netflix stock is not for the faint hearted. It has exhibited substantial volatility during the past year, being one of last year's worst performers and one of this year's best performers. We have approached Netflix in the past from a direction neutral options perspective, as illustrated the article we published on August 18, 2011, "Will the Netflix drama Have a Happy Ending," and the article we published on 2/22/2012, "3 scenarios for the Netflix sequel - investors get ready for a 3-D ride."
After reaching a three-month high of 77.1 on 1/30/2012, Netflix's 14-day RSI is currently at about 43.2 as of 3/6/2012. Such an RSI level is the lowest since 12/19/2011.
From a fundamental perspective, Netflix's future is still highly debatable depending on its subscriber growth potential and the competitive environment. Several new competitors have entered the movie streaming arena lately, while content costs have been increasing. The combination of rising costs, with potential lower margins to fend off the competition, may squeeze Netflix's profitability.
Investors who still believe that Netfilx can overcome such fundamental obstacles could use the current price pullback from a recent intraday high of $133.43 on 2/7/2012 to its current close of $107.13 on 3/6/2012, along with the fact that its RSI is no longer indicating it is overbought, in order to accumulate some shares. However, it would also be wise to hedge such a position with some put options, as we believe the jury is still out on Netflix.
Netflix Inc. Price Chart
Source: Yahoo Finance
It is important to stress once again that none of the stocks listed in this article have an RSI that indicates an oversold condition. However, after having been overbought in the past based on previous elevated RSIs, most have reached an 14-day RSI level that we have not seen for almost three months. Hence, on a relative basis, although for most of these stocks their price has not dipped much from recent peak levels, current 14-day RSI levels could indicate that some of the hype in such stocks has been taken out. When coupled with the fundamental potential for these companies, along with the resurging U.S. economy, this could signal a good buying opportunity for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.