Tuesday, July 22, 2008


Shares of Two-rated model portfolio holding Silicon Motion (SIMO:Nasdaq) are under pressure this morning, trading in sympathy with SanDisk (SNDK:Nasdaq). We're not taking any action in this Alert, but want to give readers our thoughts and reiterate our strategy for Silicon Motion. Shares were recently trading down 9.7%, at $12.35.

For its second quarter, SanDisk posted earnings and revenue results that missed Wall Street expectations due to ongoing weakness in NAND pricing stemming from oversupply and sluggish demand. These issues are not entirely new, as we've highlighted the negative trends in NAND pricing in previous Alerts. Although Silicon Motion makes NAND controllers rather than the commodity NAND memory that has experienced a collapse in price recently, the company's fortune remains closely tied to NAND memory leaders like SanDisk. Analysts continue to defend Silicon Motion and highlight the non-commoditized nature of NAND controllers, as well as the company's ability to differentiate itself, but we have not been so willing to ignore the issues that the company has faced.

One of the amazing features of the current market is that even after it seems as if analysts and investors have taken their expectations down, there is still almost always room for a surprise to the downside. Shares of Silicon Motion have fared better than SanDisk, and we're willing to wait to see the details in the company's quarterly results next week before taking any action. But we're not interested in trying to bottom-fish with this name, as technology and growth stocks in general have had a terrible time finding their footing in the current environment. On a long-term basis, technology can offer fantastic returns for growth- oriented investors, but we're not willing to suggest backing up the truck with these names in order to try and catch a bottom.

Our focus during earnings season is on our Watch List names, as well as other stocks that might offer the large upside potential we're aiming for in the Breakout Stocks model portfolio. Health care has been a huge focus for us, and we're closely watching and waiting for quarterly results from our favorite names in order to determine an attractive entry point. We continue to watch other sectors - - including software and energy -- but we believe that small-cap growth names in biotech, scientific equipment and health care information technology can offer significant upside for investors while carrying a modest risk profile, compared to many other sectors that continue to show weakness.

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