The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, January 26, 2005
Email – #226
** China, Technology, Volatility and Insider Buying
I don’t think you will find a more volatile pick than the next one. It has all the makings of a huge hit…. along with A LOT OF RISK. In fact I can’t think of a company that could double in price just as quickly as it could drop in half. So, please keep this in mind before you commit capital to this pick.
A few months ago, in September, UT Starcom ( Nasdaq: UTSI ) was rocketing higher after a bunch of insiders, officers of the company, went on a huge buying spree of their own stock. In total they bought 350,000 shares at an average price of between $14.50 and $16 per share. That is quite a chunk of change and a good indicator of what the management thinks will happen in the future.
What was more surprising was that they bought on the heels of a disappointing quarter. After the buys at $14.5, the shares soared to $23, a move of $7 per share in three months. The company then announced that some of the orders they expected in 2004 would be carried into 2005 resulting in lower than expected earnings and revenues for the fourth quarter, and God-forbid the Chinese economy showed signs of slowing as well! The shares sold off and the stock popped back up on my screen.
Insiders can be wrong… it happens infrequently, but it does happen. However, they have a way out. They can sell shares just as easily as buying them, within prescribed legal limits of course. In this case insiders have not sold.
UTSI designs, manufactures and sells communications products in China and around the world. China is its biggest market and the company’s sales have been soaring as China’s economy has been growing – until this past quarter when sales in China actually fell.
There were several reasons for this fall. The slowing Chinese economy was one reason. But the larger reason, according to my research, was the maturation of the companies PAS market. UTSI’s personal access system (PAS) has been broadly accepted by the Chinese telecom providers. The system allows for easy, affordable wireless access and feature expansion.
For the telecom providers, UTSI’s PAS has resulted in a quick return on their investment – between two and three years. The problem is that the PAS system is just the first step. While adequate for the current needs of China, it does not have the advances in technology associated with the next generation of wireless technology. That is why UTSI has also developed and deployed switching platforms that allow operators to deploy not only their PAS system, but also broadband and 3G (third generation) wireless technology.
The company has a complete package that allows these operators to make money by deploying UTSI’s products across existing and new infrastructure.
The migration from PAS to the next generation technology in China and Asia is where UTSI stands to clean up. Recently, the company signed a $120 million agreement with China Telecom to expand its networks in several Chinese provinces.
China is a massive market – that is not news. But one thing that most people ignore is that China does not have much of a communications infrastructure outside of the major developed metro areas. In fact, several hundred million Chinese have no access to wireless services. And that is about to change. Now, don’t get me wrong here – more than half of the population probably can’t afford a cell phone, let alone, have the need to use one. But that still leaves hundreds of millions of people who are participating in the urbanization of China.
This massive urbanization program is driving the Chinese economy, and it requires huge investment in infrastructure by the government and the telecommunications companies. Fortunately, thanks to U.S. consumers, China has a ton of cash to spend on such projects. But China is not the end-all for this company, and as the last quarter showed, China can also experience mini slowdowns.
UTSI is currently trading at about $4 above its book value, and less than 10 times forward projected earnings. And, therein lies the risk. The company’s warning for the fourth quarter has caused investors and analysts to second-guess their outlook for the company, hence the opportunity.
The company has stated, in no uncertain terms, that it expects to become highly profitable again in 2005. This makes things easier for us as well. For the first quarter of 2005 the company expects to record between $770 and $780 million in revenues and 20 to 22 cents in earnings. If it delivers, and continues with a positive outlook for the rest of the year, the shares will soar. If not, the shares will tank.
So, instead of a 2-year LEAP, we will take our chances with a 1-YEAR LEAP option. This will allow us to participate in any of the upside for the coming year.
Action to Take:
Buy the UT Starcom (Nasdaq: UTSI) January 2006 $20 call option (symbol: WQZ AD). The option is currently trading for $2. DO NOT PAY MORE THAN $2 for this extremely liquid option. We will set an INITIAL MENTAL STOP-LOSS at $1. Please do not overpay. As you have seen over the years, YOU CAN get filled at or below the limit price, if you are patient. Our initial target on this SPECULATIVE pick is $3 by April 2005.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: UT Starcom (Nasdaq: UTSI)
Option / Symbol: Jan. 06 $20 call (WQZ-AD)
Date Purchased: New
Current Price: $2.00
Comment: Buy at $2 or better.
Company / Symbol: AngloGold/Ashanti (NYSE: AU)
Option / Symbol: Jan. 07 $40 call (VKE-AH)
Date Purchased: 1/5/04
Current Price: $3.80
Comment: Hold.
Company / Symbol: General Electric (NYSE: GE)
Option / Symbol: Jan. 07 $40 call (VGE-AH)
Date Purchased: 1/4/04
Current Price: $2.55
Comment: Buy.
Company / Symbol: Daimler Chrysler (NYSE: DCX)
Option / Symbol: Jan. 07 $40 put (VLN-MH)
Date Purchased: 11/30/04
Current Price: $3.60
Comment: Hold.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Sell Jan. 06 $25.00 call (WNL-AE)
Date Purchased: 11/2/04
Current Price: $1.40
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Intel (Nasdaq: INTC)
Option / Symbol: Jan. 06 $22.50 call (WNL-AX)
Date Purchased: 10/19/04
Current Price: $2.40
Comment: Hold
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Sell Jan. 07 $30 call (VSW-AF)
Date Purchased: 12/10/04
Current Price: $2.20
Comment: Hold. Sold call against Jan 07 $25 position.
Company / Symbol: Interactive Corp. (Nasdaq: IACI)
Option / Symbol: Jan. 07 $25 call (VSW-AE)
Date Purchased: 9/14/04
Current Price: $3.90
Comment: Hold. No TS.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Sell Jan. 06 $30 call (WIK-AF)
Date Purchased: 2/9/04
Current Price: $0.05
Comment: Hold. Sold call against Jan. 06 $22.50 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (WIK-AX)
Date Purchased: 8/29/03
Current Price: $0.15
Comment: Hold. No TS.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan. 06 $15 call (WZY-AC)
Date Purchased: 11/6/03
Current Price: $3.50
Comment: Hold. Sold call against Jan. 06 $12.50 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 06 $12.50 call (WZY-AV)
Date Purchased: 7/28/03
Current Price: $5.10
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.44
Comment: Buy under $10. No TS.
Bio:
Karim Rahemtulla is the former Investment Director of The Oxford Club. The editor of The Smart Options E-Report, The Income Trader – A Covered Call Strategy and The LEAPS Option Trader, Karim is also a regular contributor to The Oxford Club Communiqué. His highly successful trading systems use covered calls and LEAPS to boost returns on blue chip stocks, and during the bear markets of 2000 and 2001, his picks outperformed the major market averages. Educated in England, Canada and the U.S. and fluent in several languages, Karim travels the world to find the best investment opportunities for our members.
Copyright – 2005 Mount Vernon Publishing. Mount Vernon Publishing does not act as an investment advisor or advocate the purchase or sale of any security or investment. Mount Vernon Publishing expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Mount Vernon Publishing provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Mount Vernon Publishing has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Mount Vernon Publishing, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
