NEW LOW OBSERVER

Today the price of Marvell Technology increased +8.49% after news of KKR & Co. having acquired 5% of the chipmaker.  According to Bloomberg News:

“KKR & Co. (KKR) has acquired almost 5 percent of computer chipmaker Marvell Technology Group Ltd. (MRVL), two people with knowledge of the matter said.

KKR sees the Hamilton, Bermuda-based company as undervalued and has discussed its holding with the company’s co-founders, Chief Executive Officer Sehat Sutardja and his brother Pantas, said one person, who asked not to be identified as the information is private. One scenario New York-based KKR is considering is a leveraged buyout of Marvell, though no such deal is imminent, the person said (source link).”

On our Nasdaq 100 watchlist dated June 20, 2012, we had the following to say about Marvell Technology (found here):

“Dow Theory suggests that the following are the downside targets for Marvell:

• $10.61
• $7.54
• $4.47

So far, Marvell has fallen within 6% of the $10.61 target, however, it has not breached that point thus far.  We’d be buyers of the stock at $8.25 with little regard for downside risk at that point in time.”

Since June 20, 2012, Marvell has had the following price performance:

If measured by the very first day that Marvell fell below $8.25, the stock has increased +66.18% in just over one year ($7.57-$13.03).  However, if Marvell were measured based on the price before the announcement of KKR’s interest in the stock, the increase in the stock has been +45.57%. 

From our perspective, considering Marvell undervalued after a +45% run up in the price is a stretch.  However, we suspect that KKR will try to squeeze out as much of this stock as possible.  Charles H. Dow, co-founder of the Wall Street Journal, has the following to say on this particular topic:

“It is a matter of comparative indifference with a large operator whether the stock which he is handling is a point or two higher or lower.  The thing which is important is whether the public follows up the advances so that he can sell (Dow, Charles H. Review and Outlook. Wall Street Journal. June 29, 1899.)”

In this case, the large operator is KKR & Co.  Their goal is to see that Marvell rises as much as possible after they have taken a sizable position.  One method to do this is to announce, through major channels of communication with unnamed sources, that they have taken a sizable position.  What should happen next is continued speculation of whether or not Marvell is acquired by a competitor or another private equity firm, ultimately pushing the stock price higher.  Unfortunately, those relying on such information may be caught holding the bag if all the rumors are proven to be just that.

It is Dow Theory that has pointed us in the direction of when to look to acquire or accumulate stocks and it is also Dow’s theory that suggests when to be cautious and possibly sell.  For now, Dow Theory indicates that the fair value of Marvell is $14.58.  Exceeding the fair value target offers up significant opportunity.  Remember, a large operator like KKR isn’t aiming for a “point or two higher.”  If the rumors are true, KKR probably has their sights set on $22 or above. However, any price above $14.58 should be considered speculation, at best.

“Affairs are easier of entrance than of exit; and it is but common prudence to see our way out before we venture in.” –Aesop