From Briefing.com
Trader's Edge: Tut Systems (TUTS)
08-Sep-99 00:03 ET
Tut Systems (TUTS) 26 7/8 is one of the original Internet backbone plays. The company came to market in January of this year in an initial public offering priced at $18. But since making an all-time high of $86 1/4 a few days after the IPO, it has been all downhill for TUTS. Believe that much of decline in stock is a result of profit-taking by institutional investors who picked up the shares at the IPO price and "insider" selling. But as Ditech Communications (DITC) has proven since our August 18 Trader's Edge (issue has rallied 154% in 3 weeks), only takes a single session to move from obscure networking start-up to latest Internet backbone rage.
Description: Tut Systems designs communications products which enable high-speed data access over copper wire. The company's products include Expresso high-bandwidth access multiplexers, associated modems and routers, XL Ethernet extension products and integrated network management software... For the recently reported 2nd qtr, TUTS posted a Q2 loss of $0.23 a share, two cents narrower than Wall Street views, compared to a yr-ago loss of $0.49. Revenue rose 89% to $5 mln.
Trading Points
Ahead of Friday's employment report, would have expected to have seen Tut Systems confined to a trading range of $23 to $30 over the near-term. But the benign economic numbers have helped to move equity markets from under the shadow of Fed Chairman Greenspan's foot; at least, as far as traders are concerned.
Price action today in momentum stocks Globespan (GSPN 102 +24 1/4), Red Hat (RHAT 108 +23 1/16) and Brocade Communications (BRCD 108 +23 1/16) demonstrates an increased willingness by traders to bid the highflyers up into the close and hold them overnight. In this type of environment, stocks quickly reach nose-bleed territory, sending the more value-oriented of the momentum group (not an oxymoron in this case, rather a relative term) in search of stocks with breakout potential and limited downside in the form of firm support levels.
TUTS shares certainly fit the bill. The stock has been recently eyeing $30 resistance. A move through this level could set shares up for a rally to... Well, to be honest with you, where ever the momentum happens to run out. Given that majority of these stocks trade almost exclusively on momentum, it is pointless to extrapolate a price target based on valuation metrics.
Tut Systems is already rated "strong buy" at two of the three of the firms following the stock and "buy" at the other, which lessens chance of breakout being ignited by an upgrade. Should breakout move occur, it is likely to be sparked by press release announcing contract win or strategic agreement. If the group continues to make new highs, TUTS may have opportunity to ride coattails of more visible backbone stocks over the top of resistance.
The stock added 11% on Tuesday after a money manager named TUTS his favorite play on high-speed Internet access. Positive comments caused issue to gap up 10.8% at the open. Would prefer to see these normally weak hands shaken out before entering the stock. True opportunist may wish to lurk in the shadows until stock makes a earnest assault on $30 resistance.
Valuation vs "Backbone Highflyers"
Market-Cap Price/Sales Ratio P/E (FY00) Gain From IPO
Tut Systems (TUTS) $0.3 bln 20 269 49%
Juniper Networks (JNPR) $9.7 bln 309 n/a 470%
Brocade (BRCD) $5.6 bln 126 478 1057%
Redback Networks (RBAK) $4.7 nln 188 548 776%
Principal Competitor Comparison
Current Price 52-Week Range P/E (FY00) Analyst Ratings
Tut Systems (TUTS) 26 7/8 20 1/2 - 86 1/4 269 2 strong buy, 1 buy
Cisco Systems (CSCO) 70 3/8 20 9/16 - 70 15/16 72 19 strong buy, 13 buy
Paradyne (PDYN) 45 31 3/4 - 58 346 2 strong buy, 1 buy
PairGain (PAIR) 9 11/16 6 - 16 1/8 27 9 buy, 9 hold
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