Great Trades

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Wednesday, January 11, 2006


RMBS Sell Opportunity

Rambus (RMBS) is trading up over 22% today to near $35 after a WR Hambrecht upgrade to Buy from Hold with a year-end target of $38. The judge in a lawsuit against Hynix last week rejected Hynix's request to dismiss the case on grounds that Rambus had allegedly destroyed evidence, causing the stock to gap up from the 18's to the 22's. The upgrade assumes RMBS wins not only the current Hynix case, but also patent infrigement cases against Micron and Samsung, as well as their price-fixing case against Micron, Hynix, Samsung, Infineon, and Siemens. In addition, the analyst for some reason applies a 3x sales multiple to the potential litigation proceeds, thus assuming $27/share should be added to the stock price as a result of the litigation.

Because the Hynix trial isn't scheduled until March, and the price-fixing trial date hasn't even been set yet, we believe assuming RMBS wins these trials and collects royalties from all of them this year, and valuing those wins into the stock now is faulty analysis. In addition, technically, the stock is very overextended, having more than doubled on the year already. With resistance from 2 years ago in the $36 area, the weekly Upper Bollinger Band at $25.69, 8-week RSI near 96 and 5-week RSI near 98 (max theoretical is 99.99), we think the current price provides an excellent sell point or sell short opportunity (to hedge our long positions). We expect at least a retrace in the short term and likely much lower levels longer term. RMBS is currently trading at a forward PE ratio of around 140.

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