UTSI: Recovery In Progress

The share price of UTStarcom (UTSI) went up 13% today to $7.47, following its Q2 earning report. Prior to that, the price had dropped from $8+ to mid-6s on a downgrade ("underperform") from a Bear Stern analyst, who stated that UTSI's high margin business, PAS infrastructure and handset, will drop to insignificant level within a couple of years. In the mean time, the Yahoo! message board was filled with negative "assessments" by fundamental and technical analysts with allegedly good track records. Lessons learned here:

1. BS's downgrade, either the motive or his judgement, just before the Q2 report while the price was recovering was clearly questionable. This just adds to my long-time suspicion about the trustworthy of the whole financial "news" industry, which in my opinion is corrupt. [The same guy downgraded China Mobile a couple of years ago when CHL was priced $16. CHL now trades at $33.]
2. All the analyses by BS as well as other online commentators clearly missed the very important point: valuation. UTSI's Price/Revenue of 0.3 is the lowest in telecom industry, which averages above 1. The company has over $600 mil cash balance and has had five consecutive quarters in which the operating cash flow was positive. Even if the entire PAS revenue (30%?) disappears, its other divisions (broadband, PCD, IPTV, etc.) are worth something. Before UTSI had its PAS business prior to 2002, its share price were rarely below $12!
3. Contrary to one self-claimed TA expert's analysis on the Yahoo board, which said that UTSI was technically in a downtrend, I believed the otherwise. The MA alignment is perfectly positive. In fact the recent pullback is almost necessary so that the weekly relative strength retouch the 20-period MA, which has turned up during last couple of months. UTSI formed a double-top breakout pattern recently and it's still valid.

As I learned in reservoir mapping exercises, all trends or models are local, i.e., a matter of scale. In stock analysis it is the time horizon. My horizon: days to months. Call me short-sighted, but in most cases I just cannot see farther out than that!


4. Almost all of the UTSI-related news and articles found online recently had a negative tone, questioning UTSI's very survival and offering analyses of why it had "failed" as a company. This reminds me of early 2004, when every report about the Company was rosy. At the height of it, the Company was featured in a cover story on Business Week and named the Best Employer of the Year by another news organization. Recently the Company has been labelled one of "the ten worst managed tech companies in US" on Seeking Alpha. In both times, the contrarian approach seemed working well.

   I actually think that, notwithstanding the mistakes of mismanaging the growth and expansion during several years, the management has done a great job of successfully diversifying its business (in product lines and geography) and developing new technologies such as IPTV and dual-mode handsets in such a short time.
   

5. It pays off to follow a company very closely and for many years. Doing so has, up to now at least, made me a better analyst than some of those working for big financial institutions. Theoretically the process can last forever and one can make money from the same company forever as long as it is publicly traded and that its business, hence the share price, fluctuates.

In summary, my hypothesis is that UTSI will stay in an uptrend from now on, with its customary volatility expected along the way. The next quarter is a slow one and the real breakout may be six month away - when the Company reports positive earning for the first time in a long time. Any new contracts (IPTV in China/India/LatAm/Europe) or a PCD alliance with a tier-1 telecoms in US) could cause spikes in price. Risk/Reward: moderate/high. Exit Strategy: Sell if price breaks below 5.9, which is the support for the recent double top breakout.