Two Stock Picks for Oct 26, 2007

I’ve had my eye on two stocks recently. I’m a big fan of buying stocks that have been oversold after bad news (or the perception of bad news). These two stocks fit that mold perfectly:

Sandisk
Ericsson

Ericsson is a major telecommunications equipment manufacturer with operations in both fixed and wireless networks. It holds a large portion of the 3G wireless market and doesn’t appear to be letting go with 4G approaching. Earnings for the most recent quarter were lower than analysts expected and earnings were cut going forward, into 2008 as well. However, the punishment, almost 1/3 of the value of the company gone, was, in my opinion, overdone. The company is still the dominant player in the wireless networks market and is gaining market share. With 2008 EPS of ~$2.50 and the current stock price of ~$30, that’s a P/E of 12 for a company that is a strong player in a fast growing wireless industry. Add onto that the fact that there’s good support at the $29-30 level and I’m a buyer here.

Sandisk on the other hand exceeded analyst expectations on earnings, but issued a slightly worrisome report on margins and average selling prices going forward. Since its report, Sandisk shares have been pulled down about 20%. NAND flash prices have been trending down for the entire industry after a pop around mid-year. Their estimate of 16% lower average selling price for the 4th quarter compared to the 3rd quarter isn’t that far off the mark of current market trends. Despite the lower ASP, Sandisk is still forecasting inline revenues for the 4th quarter, which indicates it will sell more units that previously expected. With its large presence in the mobile space (providing NAND to mobile handset makers, who are increasingly looking to add photo and music playing abilities) and solid earnings growth of 25% going forward, this stock is definitely worth more than the 16.5-17 forward P/E it currently holds. I’d look for the stock to move from the current ~$40 back to the $50 range before then end of the year, when investors realize the earnings report was no reason for the doom-and-gloom reaction.

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