Thursday, December 6, 2007

Oversold and the $3 mendoza line

There has been a lot of discussion regarding the book value and the discount the market is assigning to UTStarcom. Analysts have lowered price targest to the $3-3.5 range. S&P, which once had a sum of the parts valuation of $11 earlier this year now has a $3.5 target or about 60% of book value.

Explanations for the low price ranged from continued losses into 2008, lack of visibility, poor management, bad internal controls, bloated expenses, stiff competition, bad regulatory environments in their core iptv markets, low margins, shorts piling on, long funds having to force liquidate, lack of near-term catalysts, end of the year tax selling, greedy management, lack of BOD oversight, uncertainty in refinancing CB and short term loans, and others.

Facing all of this, the stock has dipped under the mendoza line and has become unmarginable further increasing selling pressure as margin traders have to liquidate or cannot buy using their holdings. This has made just keeping UT very expensive from the loss of buying power.

Anyway, just wanted to recap the share price history under $3. Despite all of the above selling pressures, UT has held the 52 week low back in August and have managed to sneak above the mendoza line ($3) for the most parts. A "trend" is starting to develop where the stock trades under $3 for about 6-8 days and then starts going up. These are the following dates and number of trading days under $3.

8/7-8/16 (8 days)
8/22-8/31 (8 days)
9/10-9/17 (6 days)
11/1-11/12 (8 days)
11/15- current (14 days)

The number of days show that it takes time for the margin players to get washed out and some time for longs to get confidence back and see if the lows will hold. I believe the stock is definitely in oversold territory even in the very short term (14 days under $3). The lack of news and low volume means the stock can continue to stay under $3 towards the end of the year but at some point will break above $3 and hopefully won't look back. What the data does say is don't go on margin but definitely buy under $3.

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