Cutting My Apple, Omrix, and SanDisk to Make Way For Sigmatel and Orckit

by: Shlomi Cohen

The correction over last weekend, which may well not be over yet, has prompted me to take another look at my portfolio and make a few changes. Good diversification is the golden rule, and you are constantly reminded of this when times are tough. As a consequence, I am now reducing the holdings in several stocks in my portfolio that are currently disproportionately high, even though I am convinced that they can still climb further.

The three stocks in question are SanDisk Corporation (SNDK), Apple Inc. (NASDAQ:AAPL), and Omrix Biopharmaceuticals Ltd. (OMRI), all of which have yielded splendid returns. SanDisk, in particular, has yielded a 16% return over the closing price at the acquisition of msystems, which itself represented returns amounting to hundreds of percentage points. I expect all three stocks to continue to gain strongly, but as I said earlier, in the interests of diversification, I am rebalancing my portfolio.

I am using the money I have received to double my holding in Orckit Communications Ltd. (NASDAQ:ORCT) at last Friday's closing price, even though it is still lower in Tel Aviv than in New York, despite Monday's 5% climb in the latter half of the session. I am also increasing my holding in the most "maligned" of all the stocks in my portfolio, Texas-based fabless semiconductor company Sigmatel Inc. (SGTL).

Sigmatel is a company that has numerous patents, chiefly for audio systems for flash-based media players. The stock reached the dizzying height of $45 at the beginning of 2005, thanks to a fat contract with Apple, which integrated Sigmatel's systems in its cheaper iPod Shuffle players. With gross margins in excess of 50% back then, Sigmatel was an excellent earner, and was considered the small, but "sexy" flotation for 2003 in the technology category.

Apple never states why it chooses or dumps a specific supplier, but it is known on the market that aside from the stringent technology assessments, Apple holds a form of "cockfight" between rival suppliers, in order to get the cheapest price. It was this practice which resulted in Sigmatel being dumped by Apple, with Samsung Electronics Co. Ltd. taking its place. The loss of Apple proved to be devastating blow for Sigmatel, as the stock subsequently nosedived to a low of $2.60. I disregarded the rule that you "never try to catch a falling knife," and two years ago, I picked up Sigmatel shares at $18 each.

After a string of heavy losses and profit warnings, coupled with a management shake-up, diversification into new fields, the settling of patent infringement disputes with a Chinese competitor, and the sale of non-core niches, Sigmatel finally issued a positive sales forecast three weeks ago for the June quarter which, CEO Phil Pompa said, was due to "our higher than forecast sales improvement across the board and improved execution throughout the company."

Sigmatel said that it now expects revenue for the second quarter to come in at $30-$31 million, higher than the previously announced revenue range of $24-$28 million. "We are looking forward to sharing more good news during our second quarter conference call," Pompa added. I view this as clear sign of the new management's success in saving this ship from sinking, and placing it back in a northward bound direction, which is why I am now significantly increasing the number of Sigmatel shares in my portfolio.

The increase in my holding in Orckit is due solely to the very low price that the stock recently plummeted to, a fall that for which I could find no business reasons. The massive potential that Orckit had while it awaited further contracts from Japanese telecommunications provider KDDI Corp after completing the first stage of deliveries, remains just as it was. I believe that Orckit is still on the verge of winning two mega contracts in the near future, and I won't be shedding any tears if "near future" means waiting a few months more.

As I see it, Orckit's technological platform, coupled with the hundreds of millions of dollars worth of new orders from KDDI due from April 2008 onward, and the considerable advantage it has with other large customers over its competitors, make its stock, now priced at $7.80 (of which almost $5 is net cash per share), the most attractive of all the small tech stocks I know of at present.

Published originally by Globes [online], Israel business news -
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

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