Buy Sun

I’ve been advising for well over a month now to build a position in Sun Microsystems at prices below $4. While I fully expected you to be able to buy under $4, I did not expect to see prices below $3.50. Today, however, the stock closed at $3.39 and after hours has risen to $3.40.

It went as low as $3.15 after an awful earnings report. You would have had to move quickly to buy at that price, but the stock lingered in the $3.20’s for a couple of days. Don’t fret it. We are now well below the $4 buy threshold that I specified and I continue to believe that buying this stock at these prices will look brilliant in the not-too-distant future.

The bad news is that on Sept. 29, Sun announced that in the first quarter of fiscal 2004, it would record a net loss of as much as $304 million, compared with the $61 million loss that Wall Street expected. The company is being hammered by serious rivals that include Microsoft, Intel, IBM, HP, and Dell. You really couldn’t ask for a more formidable list of enemies in the world of technology.

The good news is that at prices under $4, Sun doesn’t need to defeat those enemies in order to be an intelligent stock investment. Look at Apple. It has survived as a niche player for all of its existence and its stock has been a good investment at various times. If Sun can work out a strategy that makes its products cost-effective to customers, it will do well. It doesn’t need to become bigger than Microsoft, Intel, and IBM. It just needs to be viable and profitable. As for the value of the stock, the only time it’s been much cheaper than this was a year ago when I also advised buying.

James B. Stewart wrote today on SmartMoney.com:

“…just days after I made favorable mention of Sun Microsystems in this column, the company issued an earnings warning and the stock dropped, though not as much as I might have guessed. Since then I’ve read that Hewlett-Packard has mounted an aggressive campaign to steal Sun’s customers, while Dell Computer continues to benefit from the move away from Sun’s Unix-based servers. There’s no way this can be construed as good news. But how significant is it? I’ve read numerous analyst reports on the latest developments (analysts are overwhelmingly negative on the stock), but what it seems to come down to is this: You either believe Sun has a future or you don’t. Quarterly developments are just so much static in the long-term outlook. Though I haven’t added to my Sun position, since we’re not at one of my buying thresholds, I believe Sun does have a future. At the very least, it could be an attractive takeover target. (Sun has $5.9 billion in cash and securities, and just $1.5 billion in debt.) Meanwhile, the company said it will clarify its outlook when it announces earnings in mid-October. If you have a very strong stomach, a contrarian streak and the courage of your convictions, this could be an attractive stock at just over $3 a share.”

Count me among the people described in the last sentence. I’m using about 40% of the money I’m willing to invest in Sun to buy at $3.40. I have a limit order in to buy more at $3.20 (which, I’m frustrated to say, was missed by just pennies in the last few days).

This stock will definitely see itself priced higher than $5 in the future and most likely much higher than that. You can read more about Sun’s latest challenges and strategy in this article at BusinessWeek Online.

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