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Great stock trades based on fundamentals and technical analysis.

Saturday, December 10, 2005


OVTI Consolidating After Blowout Earnings Gap

Omnivsion, Inc. (OVTI) makes CameraChips, semiconductors for such applications as digital still and video cameras, cell phones, personal digital assistants, personal computers, security/surveillance, automobiles, medical products, and toys and games. You can find out more about their products at

On December 1, behind strong demand from mobile handset manufacturers, OVTI blew away earnings estimates for their fiscal Q2 2006, reporting .41 EPS, .10 above analyst estimates of .31 and vs. .28 a year earlier. They reported revenue of $126.8 million vs. estimates of $114.6 million and last year's $84.4 million. They also increased guidance for this quarter to .42-.47 on revenue of $130 million to $140 million. vs. estimates of .33 on revenue of $118 million. As part of their board-authorized $100 million stock repurchase program, they purchased 4,620,000 shares at an average cost of $13.51 per share, a smart use of their excess cash.

That day, the stock gapped up from $18.25 to $21.78 and rallied to $22.49 before selling back to close at $21.56, all on huge volume of over 24 million shares. The upper Bollinger Band, which tends to contain the trading of the stock, was at $20.48, so the stock was technically very extended. To relieve this extended situation, the stock spent all of last week consolidating between $20.08 and $21.34. This consolidation near the highs after a big gap up is very bullish for the stock, and sets it up for another rally. On Friday, the upper Bollinger Band stood at $22.69, giving the stock plenty of upside without getting extended.

OVTI has a huge short interest, with over 20 million shares reported short as of 11/10, or over 40% of the float. The shorts have been all over OVTI since they had an SEC inquiry (that OVTI themselves initiated) last year that resulted in them restating their earnings higher than previously stated and no wrongdoing found. Herb Greenberg of CBS Marketwatch and Jeffries analyst Benjamin have led the short brigade with their criticisms and doubts about OVTI, which now appear to have been unwarranted. Despite the blowout report, these critics continued to bash OVTI, saying that something "smelled fishy," which indicated that they had nothing concrete to use against OVTI. Greenberg said he'd report back after he sees the 10Q filing, which is due out by 12/15.

On Monday, 12/5, JP Morgan came out with a note saying the stock is "still mis-priced, in our view" at "12.2 times revised FY06E EPS, a 55% discount to the mean of our coverage universe. 12.2 times earnings for a stock with 40% short interest and 20%+ EPS growth expected for the next 5 years is a recipe for a strong short squeeze rally.

Golden Cross
OVTI just triggered a "Golden Cross" buy signal: "A golden cross is a trading tool that indicates a buying trend is in place. A golden cross occurs when the 50-day moving average of a stock breaks above (crosses) the 200-day moving average. This technical indicator tells you that there are currently more people buying than selling the stock than in the past. Technical analysts believe a golden cross usually means it is safe to buy a stock and it will continue to rise."

With its discounted valuation, the huge short interest, the "Golden Cross," and the consolidation near its recent highs, OVTI looks like a great buy at current levels (closed Friday at $20.70) for a significant rally or a long-term hold. Conservative investors can use a stop loss if the 20 support area is lost to protect capital.

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