Technically, STEC Is a Buy

We examined STEC (Nasdaq: STEC) using Moving Average Convergence-Divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

There are many ways to interpret MACD, but a common interpretation is signal line crossover. Signal line crossover uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below, you can find a current chart of STEC's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! While we jest, it's actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 14 times!

Want to buy STEC today? Technically, odds are that you should flip and sell STEC sometime very soon. If that sounds like madness to you, well, we here at the Fool agree. In every market decline, technical analysis gets its share of proponents. The cries of "buy-and-hold is dead!" get louder, and individuals race to schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relative simple science: eliminating the vast complexities of evaluating true company value. It's an attractive theory, but one that is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with up to 75% of market trading now done by Ph.D.-level programmers at massive high-frequency funds, even if opportunities existed, what chance does an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to studies. There was Massey University's study across 49 countries that showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier. STEC crossed the crossover 14 times across the past year! The amount of trading in most technical analysis schemes eats away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's the antithesis of what we preach at The Motley Fool. When we look at STEC and its peers, here are the areas that interest us:

ttm = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These are areas that led investors like Warren Buffett and Bill Miller to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at STEC, don't evaluate it for crossing a momentum line. Buy it because:

• STEC has carved out its own niche in the flash memory space. While competitors like SanDisk offer products far and wide, STEC is appealing to one of the most attractive rebound areas in the economy: enterprise spending. Just last quarter, industry bellwether Intel reported blowout earnings thanks in large part to a huge spending rebound from large companies. As any economic rebound continues, STEC is poised to see large gains.
• The company’s stock took a drastic tumble after largest customer EMC delayed future orders because of excess inventory. If you believe STEC has a bright future and the situation is temporary and order volume will soon resume, then the stock is priced extremely attractively.
• Flash storage and solid state drive’s (SSDs) have seen enormous growth over the past few years. Unlike larger competitor Micron, STEC offers a pure play on this growing trend.
• The company has a rock-solid balance sheet with 20% of its market capitalization held in cash and zero debt.

These are the factors that will drive STEC's long-term wealth. Best of all, establishing a portfolio of well-managed companies with strong advantages over their competitors spares you having to sit bleary-eyed in front of a computer, buying in and out of companies with a Big Gulp full of coffee. That's the kind of future I'm looking for. Although, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, maybe it's time to buy STEC.