Fred Hickey Makes The Short Case On NetLogic (NETL, IDTI)

In the annual Barron's Roundtable of leading investment pros, Fred Hickey, editor of the High-Tech Strategist, explains why he's sees networking chip firm NetLogic (NETL) as a compelling short at this time:

NetLogic Microsystems [is] priced around $29. It is a favorite of momentum players, chart gazers and "get shorty" types that ran up this and a lot of other tech stocks at the end of the year. The stock is up 60% since October, 140% since it came public in July 2004.

The company makes TCAMs, ternary content-addressable memory chips. They go into networking equipment. When NetLogic's products came out they had an early lead, but that is lead is diminishing. This is a commodity product. Cisco (CSCO) accounts for 70% of NetLogic's business. Integrated Device Technology (IDTI), the market leader, has a stronger product and NetLogic is going to lose share.

Barron's: How expensive is NetLogic stock?

Hickey: The P/E on trailing earnings is 39. The P/E for this year's earnings is 30, yet the forecast EPS growth rate is just 12% in 2006. The stock sells for seven times sales and 8.4 times book value. There has been a lot of insider selling -- half a million shares in the past six months.

NETL 1-yr chart:

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