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Reading the Palm Pilot

01/16/03 10:41:13 AM
by Koos van der Merwe

Palm, Inc. is a share that from the day it was listed on the Nasdaq, has been falling, and yet everyone who is someone owns a Palm handheld computer. Reading its "palm," I ask, "What does its lifeline forecast for the future?"

Security:   PALM
Position:   Hold

From its listing, Palm's share price kept falling until it eventually fell below $1, a level that would have seen the share delisted from Nasdaq. The directors then did the unforgivable: they announced that the share would be consolidated. For every 20 shares held, Palm now gave you one share. Fundamentally an announcement like this is similar to committing suicide. It is an admission by the directors that they could see no future earnings in their company that would boost the share price above $1. The market is unforgiving and punished the share beating the price down.

Other companies facing the same possible delisting problem, like Nortel (NT), had directors buying the share at reduced levels, and in this way advertised that they had confidence in their company, and they foresaw good results for the future. Directors in Palm on the other hand, gave their company a vote of no-confidence. The share price before the announcement was $1.22 which consolidated into $24.40 as shown on the chart. With the announcement of the consolidation, the share price dropped to $0.67 ($13.49 consolidated), a drop of $0.53 or $10.91 (44.7%). This meant that any holder of Palm shares would have to see an 80.87% increase in the price simply to break even [($10.91 / $13.49) *100]. The numbers below shows exactly what happened on October 14th and 15th.

Oct-15-02, open: 12.55, high: 13.42, low: 2.43, close: 2.43, volume: 395,200, cns: 12.43.

Oct-14-02, open: 0.68, high: 0.69, low: 0.61, close: 0.64, volume: 14,360,000, cns: 12.80.

Palm Pilot.
Graphic provided by: AdvancedGET.
But what about Palm now? Should you add it to your portfolio? Or hold it even for the short term? Is its lifeline long and profitable or short and risky?

Warren Buffet, and Sir John Templeton have always said "only invest in a product you know." If you cannot find out anything about the company, leave it alone. With Palm's directors advertising that the future for the company was bleak, why should anyone buy the share? Taking the plunge and buying the share at $9.68 was risky, but the risk paid off. There were no technical indicators shouting BUY, yet those speculators who took the gamble scored handsomely. They have doubled their money.

The first sign technical analysts received that Palm was worth buying was when it broke above the pivot point at $12.66 on November 4th, 2002. Two days later it gave a JM buy by breaking above the upper blue band line. Since then the share has been moving sideways, in what appears to be a long parallelogram, looking as though it could break above the resistance at $18.94.

Share prices usually rise to fill a gap, and Palm appears to be about halfway, I guesstimate a target of $24.40, which is the resistance level of the upper side of the gap. Should the price break the resistance of $18.94, and I bought at $19, my profit to the target shown in the chart would be $5.40 ($24.40-$19 = $5.40).

With a 10% stop-loss on $19 ($1.90), and a risk reward ratio of 2.5 :1, I would need a profit greater than $4.75 to make the trade worthwhile. At $5.40 as calculated earlier, the trade is worth the risk, so I will watch Palm for any break above $18.94 and then BUY.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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