A FormFactor play is possible, but it's not for the squeamish

Posted Jul 6th 2009 6:30PM by Joseph Lazzaro
Filed under: Stocks to Buy

I'm issuing a Buy recommendation for FormFactor, Inc. (NASDAQ: FORM), but with a tight stop. Here's why:

FORM's revenue for FY2009 will probably decline another 30-40%, following a 55% revenue plunge in FY2008, but institutional investors are looking past current conditions, to likely corporate increases in tech spending in FY2010, driven by the transition to DDR3 technology in the memory segment.

Further, DRAM and flash memory sales are just about set to rebound, aided by recovering PC sales and strong demand for PDAs (cell phones, MP3 players, smart phones). The First Call FY2009/FY2010 EPS estimates for FORM are a loss of $1.56 to a loss of 49 cents.

However, there's considerable risk with FORM's shares -- primarily a potentially slower recovery for the chip segment, as well as increased competition in the wafer probe card segment, hence a tight Sell/Stop Loss has been deployed.

Technically, FORM's chart has formed an uptrend, but it's permeated with volatility: this is not a stock for the squeamish, or for low-risk investors.

Stock Analysis: FormFactor is a moderate-risk stock. Consider buying a 25% position in FORM now; then buy another 25% in four months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your FORM position before October 2009. Sell/Stop Loss if you were to buy shares in this company: $13.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: ddr3ram, FORM, FormFactor