Wall Street's optimism in last week's preview about the earnings of tech stocks wasn't misplaced, as there were many more positive surprises than negative ones among the stocks we looked at. This week will bring plenty more data for investors in and watchers of the sector to mull over. Apple Inc. (NASDAQ: AAPL), AT&T Inc. (NYSE: T), and Microsoft Corp. (NASDAQ: MSFT), for example, are expected by analysts surveyed by Thomson Financial to post modest earnings gains from a year ago, to $1.11 per share (on $8.1 billion in sales), $0.72 per share (on $31.3 billion in sales), and $0.47 per share (on $14.8 billion in sales) respectively. All three of these companies ended the week closer to their 52-week lows than highs, and analysts on average consider them each a buy.
Here's a look at some of the week's biggest expected earnings gainers and decliners in the sector:
Baidu.com Inc. (NASDAQ: BIDU): $1.25 per share (+44.0%) on revenues of $134.7 million (+103.2%)
Broadcom Corp. (NASDAQ: BRCM): $0.44 per share (+38.6%) on revenues of $1.3 billion (+33.8%)
QLogic Corp. (NASDAQ: QLGC): $0.31 per share (+29.0%) on revenues of $170.0 million (+21.2%)
FLIR Systems Inc. (NASDAQ: FLIR): $0.32 per share (+28.1%) on revenues of $275.2 million (+44.0%)
Juniper Networks Inc. (NASDAQ: JNPR): $0.30 per share (+26.7%) on revenues of $927.4 million (+26.2%)
Waters Corp. (NYSE: WAT): $0.75 per share (+17.3%) on revenues of $391.6 million (+11.1%)
MOST NOTEWORTHY: RF Micro Devices, QLT Inc and Everest RE Group were today's noteworthy upgrades:
Jefferies upgraded RF Micro (NASDAQ:RFMD) to Buy from Hold citing strong proprietary Asian channel checks. The firm believes RF Micro is past the worst of the inventory handset correction in Asia and that the MPG business is also recovering.
RBC Capital said QLT Inc's (NASDAQ:QLTI) risk/reward has improved and expects divestment announcements to start in late Q2. The firm raised shares to Outperform from Sector Perform.
Citigroup upgraded Everest RE (NYSE:RE) to Buy from Hold citing valuation, likely buybacks, the low risk of asbestos charges and the seasonal trade ahead.
MOST NOTEWORTHY: GlaxoSmithKline, FreeSeas and SINA Corp were today's noteworthy initiations:
ING believes GlaxoSmithKline (NYSE: GSK) should benefit from the appointment of Andrew Witty as CEO and see limited downside risks. The firm initiated shares with a Buy rating.
FreeSeas (NASDAQ: FREE) was started at Oppenheimer with an Outperform rating and $8 target, as they view FREE as an early stage growth company in the smaller dry-bulk vessel segment and finds the valuation attractive at current levels.
Kaufman Bros. initiated SINA Corp (NASDAQ: SINA) with a Buy rating and $4.50 target, and believes China represents a compelling long-term growth opportunity.
OTHER INITIATIONS:
Level 3 Comm (NASDAQ: LVLT) was initiated with a Underperform rating at Wachovia.
Jefferies assumed Savient Pharma (NASDAQ: SVNT) with a Buy rating and $30 target.
Lehman initiated Brown & Brown (NYSE: BRO) with an Underweight rating.
MOST NOTEWORTHY: UBS AG, KLA-Tencor and Level 3 Comm were today's noteworthy downgrades:
Keefe Bruyette downgraded shares of UBS (NYSE: UBS) to Underperform from Market Perform as they expect as they expect further write-downs to erase profits in 2008.
Oppenheimer downgraded shares of KLA-Tencor (NASDAQ: KLAC) to Underperform from Perform after checks indicated Intel (NASDAQ: INTC) has chosen Applied Materials' (NASDAQ: AMAT) reticle inspection tool for its entire 32nm node after a long period of evaluation against KLA-Tencor. Oppenheimer believes this represents a $300M shift from KLA-Tencor's dominant market share in reticle inspection.
Jefferies cut Level 3 Communications (NASDAQ: LVLT) to Hold from Buy as they see limited opportunity for near-term share appreciation given the company's integration challenges and the added uncertainty from recent management changes.
OTHER DOWNGRADES:
Keefe Bruyette downgraded Credit Suisse (NYSE: CS) to Market Perform from Outperform.
Kroger (NYSE: KR) was downgraded to Underweight from Neutral at JP Morgan.
MOST NOTEWORTHY: The Managed Care sector, Keryx Biopharma and Citrix Systems were today's noteworthy downgrades:
Goldman downgraded the Managed Care sector to Neutral from Attractive following WellPoint's (NYSE: WLP) reduced 2008 outlook. The firm said WellPoint's issues reflect a company specific underwriting error but also industry-wide pricing pressures which increase the risk of a cyclical slowdown in managed care. WellPoint was also downgraded to Neutral from Overweight at JP Morgan.
Banc of America cut Keryx Biopharma (NASDAQ: KERX) to Neutral from Buy and lowered their target to $1.00 after Sulonex failed to meet its primary endpoint.
Jefferies downgraded shares of Citrix Systems (NASDAQ: CTXS) to Hold from Buy, as they believe the first half of 2008 will be a tough year for software and are increasingly worried about the macro environment.
OTHER DOWNGRADES:
Level 3 Comm (NASDAQ: LVLT) was downgraded to Underweight from Market Weight at Thomas Weisel.
Shares sold short in Yahoo! Inc. (NASDAQ: YHOO) dropped by 16.4 million to 39.1 million. It may be that rumors the company could be taken over have driven out shorts. There have also been news reports that the internet portal could cut as much as 20% of its staff to improve operating income.
Short interest at Intel Corp. (NASDAQ: INTC) fell 14.1 million shares to 55.6 million. The largest semiconductor company still appears to be taking market share from rival Advanced Micro Devices (NYSE: AMD). A bet against Intel is now largely a bet that global PC sales will fall. While the U.S. market may be soft, sales in Asia are still brisk.
One of the most troubled large companies listed on Nasdaq is Level 3 Communications (NASDAQ: LVLT). The firm still has the largest short interest of any listed on the exchange at 153.8 million. But, that fell 13.7 million between December 14 and December 31. The stock has fallen so far that investors may simply believe that shares will hold their own if financial results are acceptable. The stock has a 52-week high of $6.80 and now trades at under $3.
Short interest in Comcast Corp. (NASDAQ: CMCSA) dropped 7.3 million shares to 44.5 million. Market concern that telecom companies are taking cable TV and broadband customers have driven Comcast from $30 in the middle of last year to just over $17. Some analysts believe that this is too much of a correction and that cable firms still have the inside track for providing consumers with voice, broadband, and TV service.
Douglas A. McIntyre is an editor at 247wallst.com.
Level 3 Communications (NASDAQ: LVLT) is one of the most widely traded and widely shorted stocks of any listed on a U.S. exchange. Average daily volume in the shares is over 41 million, and shares sold short as of mid-December were over 167 million. That is tops of all companies listed on the Nasdaq.
Level 3 would appear to be in a good business. It has 50,000 miles of IP backbone to transport voice, data, and video. It provides services to the country's largest cable and telecom companies.
Level 3 has taken a beating in 2007 falling form $6.80 to just above $3. Wall Street has to wonder how it gets back toward $7.
For starters, the company has to stop making an acquisition a month. The company's Level 3's latest 10-Q lists seven deals. It is not unfair for Wall Street to be concerned about the pace of these purchases, especially since Level 3 does not make money. In the September quarter, the company had an operating loss of $53 million on revenue of $1.061 billion. Level 3 also made $138 million in interest payments on its $6.8 billion in long-term debt.
Last week, Citadel Investment Group, a Chicago hedge fund, bought E*Trade Financial (NASDAQ: ETFC)'s collateralized debt obligation (CDO) portfolio for 27 cents on the dollar according to The Wall Street Journal [subscription required]. If this price was applied to the Level 3 assets of nine of the largest banks, it would wipe out the capital of three of them.
It's important to point out, before presenting this analysis, that the 27 cents on the dollar price that Citadel paid applied only to E-Trade's CDOs. It may represent a worst case scenario price for these banks. Furthermore, the Level 3 assets of these nine banks include other illiquid securities besides their CDOs. Finally, the calculations I'll show are based on the most recent Level 3 assets and equity of these banks as of last month.
Having said that, here are the three banks whose capital would be wiped out if that 27 cents on the dollar valuation was applied to their Level 3 assets and written off from their most recent capital levels:
A collection of widely traded stocks making 52-week lows often shows sentiment for which industries and investing themes are out of favor.
Some of last week's lows:
Level 3 Communications (NASDAQ: LVLT): The company has one of the largest data and voice networks in the country. But pricing pressure on bandwidth costs and trouble integrating acquisitions did a tremendous amount of damage to the shares when the firm announced third quarter numbers. The stock traded as low as $2.90, down from a 52-week high of $6.80. But, LVLT's real sin is the amount of debt it carries -- almost $7.4 billion. The current market hates balance sheets that indicate too much borrowing.
MOST NOTEWORTHY: Trident Microsystems, Comcast, Level 3 Communications, Ambac Financial and MBIA Inc were today's noteworthy downgrades:
Jefferies downgraded shares of Trident Microsystems Inc (NASDAQ: TRID) to Hold from Buy and lowered their target to $9 from $20 following the company's mixed quarter as they expect TRID to lose share in the TV market and face increasing price pressure. Shares were also downgraded to Hold from Buy at Deutsche Bank. Oppenheimer lowered Trident to Neutral from Buy, citing disappointing December guidance, delay in TV ramp, and expectations that 2008 will be a peak year for TV chip ramp revenues.
CIBC downgraded shares of Comcast Corporation (NASDAQ: CMCSA) to Sector Performer from Outperformer following the weak Q3 results to reflect increasing competition in telco video, slower broadband growth and the weakening economy.
JP Morgan downgraded Level 3 Communications Inc (NASDAQ: LVLT) to Neutral from Outperform following disappointing Q3 results and guidance.
Friedman Billings downgraded shares of Ambac Financial Group Inc (NYSE: ABK) and MBIA Inc (NYSE: MBI) to Market Perform from Outperform citing lack of near-term catalysts and uncertainty surrounding the credit markets.
A look at a list of 52-week lows sometimes signals market sentiment about certain sectors or broader financial trends. Here are a few critical bottoms hit last week:
Level 3 (NASDAQ: LVLT) would seem to be a poster child for the new demand for bandwidth. It has a huge national network covering 48,000 miles and a first-rate customer base including big telcos and cable companies. It also carries a lot of VoIP traffic. The company hit a 52-week low because it has something Wall Street hates right now -- a ton of high-yield debt backed by shaky cash flow. The debt is over $6.8 billion, and LVLT has had negative operating income for each of the past three years. The stock is being sold off just before earnings because any sign of weak earnings is exposure to significant balance sheet problems. Borrowing is not popular these days.
Toyota (NYSE: TM) should be riding high. It has passed General Motors (NYSE: GM) as the world's largest car company and is more profitable than any of its global peers. But, hyper-growth may be catch up with the Japanese company. It slipped from the top spot in the Consumer Reports vehicle reliability survey and had to recall 470,000 cars in its home market. GM's new UAW contract will also make it a rougher competitor.
Level 3 Communications Inc (NASDAQ: LVLT) flexed it muscles yesterday when it announced that it would be dropping prices for its content delivery network (CDN) services. Level 3's stock jumped over 4% on the news.
The IP-centric service provider has boasted for years about its low-cost structure and constant inferences that it could slash prices and drive volume unlike any other network provider in the country, if not the world. This is the first time the company has been so public about a specific price action.
Lisa Guillaume, VP of CDN Product Development for Level 3, said CDN services usually carry a 20 to 30% premium over the cost of transport, in a LightReading.com interview. This pricing action eliminates that differential. The ownership of a massive long-haul network and CDN platform will allow Level 3 to do this profitably, she added. Level 3's network was designed to play the price-elasticity curve for bandwidth consumption in the Internet age. Volume increases in bandwidth consumption would offset per-unit price declines for transporting all those bits of information for MySpace, YouTube and Wallstrip.com.
Level 3 reported light revenue and earnings in the most recent quarter as it attempts to integrate seven acquisitions that it has completed during the last eighteen months. Demand for its services is strong, but the company is having issues getting the new customers onto their network.
After years of anticipation, possibly yesterday's announcement is a sign that Level 3 is finally ready for prime time and will be able to drive its business model, leading to higher revenue and profit growth. The company is due to report earnings on October 23 -- a must listen to call for investors.
MOST NOTEWORTHY: News Corp, Limelight Networks, Corning and Carmike Cinemas were today's noteworthy initiations:
RBC Capital is positive on News Corporation's (NYSE: NWS) strategy of investing cash flow away from mature enterprises to fund high-growth initiatives such as Sky Italia and Fox Interactive Media. The firm initiated shares with an Outperform rating and $26 target.
Kaufman Brothers rates Limelight Networks Inc (NASDAQ: LLNW) a Sell based on a significant increase in the competitive environment with Akamai discounting on large deals, Level 3 Communications Inc (NASDAQ: LVLT) introducing a competitive offering in November 2007, Korean major-CD Networks becoming aggressive, and new entrants becoming aggressive with their value propositions.
Deutsche Bank initiated Corning Inc (NYSE: GLW) with a Buy rating and $31 target as they believe shares are fundamentally undervalued given the company's strong fundamentals and promising outlook.
Carmike Cinemas Inc (NASDAQ: CKEC) was started at JP Morgan with an Overweight rating. The firm said the company is the most exposed to 3-D, which could lead to potential upside due to low margins and leverage capital structure.
OTHER INITIATIONS:
UBS started shares of St. Jude Medical Inc (NYSE: STJ) with a Sell rating and $43 target and shares of Medtronic Inc (NYSE: MDT) with a Buy rating and $64 target.
MOST NOTEWORTHY: Applix, Time Warner, Apple and Level 3 Communications were today's noteworthy downgrades:
Applix Inc (NASDAQ: APLX) was downgraded to Neutral from Buy at First Albany and SunTrust Robinson Humphrey following the acquisition by Cognos Inc (NASDAQ: COGN).
Time Warner Inc (NYSE: TWX) was downgrade to Neutral from Buy at Pali Capital. The firm has lost faith in Time Warner's executive management team and Board of Directors and feels the outlook for AOL is concerning.
Gabelli downgraded Apple Inc (NASDAQ: AAPL) shares to Hold from Buy on iPhone concerns and valuation as they view the iPhone price cut as an indication that sales are not living up to management's expectations.
Buckingham Research downgraded shares of Level 3 Communications Inc (NASDAQ: LVLT) to Underperform from Neutral citing deterioration in demand for some key products.
OTHER DOWNGRADES:
SL Green Realty (NYSE: SLG) was downgraded to Equal Weight from Overweight at Lehman Brothers.
Citigroup downgraded shares of Volkswagen AG (OTC: VLKAY) to Sell from Hold.
Zumiez Inc (NASDAQ: ZUMZ) was downgraded to Market Perform from Outperform at Morgan Keegan.
Wall Street's optimism in last week's preview about the earnings of tech stocks wasn't misplaced, as there were many more positive surprises than negative ones among the stocks we looked at. This week will bring plenty more data for investors in and watchers of the sector to mull over. Apple Inc. (NASDAQ: AAPL), AT&T Inc. (NYSE: T), and Microsoft Corp. (NASDAQ: MSFT), for example, are expected by analysts surveyed by Thomson Financial to post modest earnings gains from a year ago, to $1.11 per share (on $8.1 billion in sales), $0.72 per share (on $31.3 billion in sales), and $0.47 per share (on $14.8 billion in sales) respectively. All three of these companies ended the week closer to their 52-week lows than highs, and analysts on average consider them each a buy. 
Here are some highlights from this past week's 
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Cramer on BloggingStocks: A troika of opportunity and trouble 
Before the bell: Wall Street headed higher; automakers, retailers in focus
Waiting for the other shoe to drop: The looming credit crisis
