Reviewing Sandisk

Of the three recent trades, Sandisk was the first and most profitable. It is an excellent example of being right in theory (re: the reasoning and logic behind the trade) and in concrete result in reality (re: actual stock price movement.) However, in the case of Sandisk, the maximum profit was not captured due to trade execution.......wait let me rephrase that - operator error. The operator (myself) - sold too early in order to lock in profit and did not wait to capture full profit. This was due to several things (lack of confidence, fear, and greed).

In the case of Sandisk, I did not purchase the stock outright, instead I purchased the August 2005, $25 strike price call option. At the time of purchase the stock was trading about 28 and I purchased the option at $3.30 generating leverage of approximately 8-10 times. The day after puchase the stock traded in the $31-32 range and the option was sold for $6.70. So a 100% profit was made in one day on an approximately 10-15% move in the underlying stock. Obviously the reverse holds true and if the stock had fallen to 24 - the options would have been basically worthless. The below graphic documents the actual trade amounts and execution:



The below chart illustrates the purchase and sales points. I picked a decent move and there was high risk entailed in my choice as I was speculating entirely on an earnings report that could have gone either way in the short term (later below I will discuss why I like Sandisk and more about my trading/investing/speculating philosophy). Anyways.....here is chart:


The actual entry and exit points are clearly labelled as well as the max profit potential. Obviously there was a more ideal purchase point. I watched the stock trade extensively in early July and thought that I could pick up the August $25 calls for as little as $.50, however they never got that low. The low point was around $0.95-$1.00 reached in early July. After I missed that day the stock went up like a rocket and I was only able to get in by pure dumb luck on the last day as I decided that it was worth the gamble even though the price point that I desired earlier was missed. The result was excellent, but not very disciplined.

Ok - now into the two parts that made up this speculation experiment. I have done extensive fundamental analysis on Sandisk which I belive still has an attractive valuation (although I do not own it at present.) It will trend closely with the Nasdaq 100 and the semi-conductors, but on a Micro level the company has enormous possibilities ahead of it as it owns a great IP portfolio and stands to gain from one of the most beneficial product cycles of the next 5 years. As mobile phones are used increasingly for video, television, and mp3s - they will need to store that data. Some of the highest end mobile phones will have built in hard drives. However the mass market model will use flash memory which is Sandisk's forte.

At present they produce basically every type of format and own the IP on many of them. The format that they developed exclusively for mobile phones - Transflash (now Micro-SD) - recently received the SD card association approval. You can bet that Sandisk owns substantial IP on this one and any other semi-manufacturer who wants to be involved in the production of this and many other types of flash memory will be paying Sandisk royalties to do so. The potential size of the mobile phone market that will use these types of products is enormous and does not need to be discussed - as people have already seen the strength that the Ipod product cycle has demonstrated and the good it has done for Apple. I think we will see a similar cycle in the mobile phones - not to mention the PSP and other devices which rely heavily on flash memory.

So that's plenty of fundamental.......it is clear that a little understanding of their business was present - but what the hell does that have to do with this trade? Well basically the fundamental helps me as a reassurance. I am primarily deep down a fundamentals type guy - but I hate waiting around like most value investors as I have no patience. My goal is to combine both fundamental and technical analysis in order to increase my own confidence in the plan. When I combined that with the positive feedback that the stock was experiencing, I anticipated a positive move in the stock and I figured that I need to be in on this one. I went ahead and got in late and at higher than my desired price point - but it is clear that once the momentum guys get their hands on one of these it can really move.

Now for the reality of it? Does any of the above even really matter? Probably not - the most likely and plausible reasoning for this run (as the earnings report was actually mixed - as evidence of this - the stock was actually down in afterhours) is that the morning after earnings release, the SSB analyst who had been at Sell recommendation for several years - raised to a Buy rating - up two full notches. Other key point - Jim Cramer pumped the stock on his show in the two consecutive days.

I feel it is extremely important to distinguish the technical and fundamental analysis from this last point - because first - the fundamental analysis is just an example of numbers that I interpret and may or may not be correct or even significant - they certainly aren't for causing an actual movement in price. In contrast the technical analysis is a manifestation of the actions of others in actual and verifiable price movements - as witnessed by the rise and fall of stock prices and the size of the players behind the moves (volume indicators). Now the last point about the analysts and Cramer - as being most important.

They are part of the machine that actually moves the prices. They can help to adjust the expectations of not just myself - but also Wall Street and the Herd (retail investors). If we did not have the latter part I don't believe this move would have been what it was. I will leave everyone tonight with that insight for what it is worth. If I am repeating stuff that is too obvious to discuss - please comment and I will limit the discussion.

Best regards,

-B