A textbook case: Remedy Corp., a Mountain View, CA-based software maker.
After its initial public offering in 1995, Remedy quickly emerged as one of
the most exciting new companies in Silicon Valley. Its core product--a
software line called Action Request System, which helps solve technical
glitches in corporate computer networks--became an overnight hit as
businesses large and small began to build out extensive and often
complicated networks. And Remedy's stock, which debuted at around 12,
quickly began to take off as well, topping 50 by the end of 1996-the same
year Business Week called it the hottest growth company in America.
That wasn't quite the kiss of death-at least not right away. The stock
traded in the high 40s until the Asian crisis hit late last year. Then,
like many of its high-tech peers, Remedy's stock tumbled. But just when the
others were beginning to bounce back, IBM announced it would acquire one
of Remedy's competitors, Software Artistry. Investors and analysts feared
that would cause Big Blue to end an informal relationship with Remedy, and
that IBM would instead promote Software Artistry's products-- which would
hurt Remedy's sales.
Goldman Sachs promptly removed the stock from its coveted Recommended List
and cut its rating to Market Performer. Other brokerage firms followed
suit. In response, the already weakened stock went into a
freefall--plunging 34% to about 21 1/2 two days before Christmas.
Investors' fears seemed justified when in January Remedy's fourth-quarter
earnings came in four cents below analysts' expectations. The stock now
trades at just over 17--almost 70% below its all-time high.
But some investment pros believe that investors may have overreacted to
Remedy's recent problems, and that a rebound may be in the cards. One such
bull is analyst Emeric McDonald at Amerindo Investment Advisors, the
largest holder of Remedy's stock. Amerindo added about 565,000 shares in
the fourth quarter of 1997, boosting its total holdings to just over 4.1
million shares, or about 14% of the total shares outstanding, according to
Vickers Stock Research.
McDonald believes that Wall Street's gloomy reaction to IBM's intended
acquisition of Software Artistry was too severe, and that it really won't
have that big an impact on Remedy. He points out that Software Artistry
caters mostly to very high-end users who have the largest, most complicated
networks-a fraction of Remedy's market. McDonald also contends that the
referrals Remedy got from IBM in the past comprised less than 10% of the
company's sales. Both analysts agree that the company's earnings shortfall
in the fourth quarter was more a result of problems it is having with its
newly expanded sales force than with the loss of referrals from IBM.
Analyst James Pickrel of Hambrecht & Quist says Remedy is taking the right
steps to get more productivity from its sales force, including a new
training program that should produce better marketing for the company's
products. Both he and McDonald believe that Remedy will hire a new
vice-president of sales (the old one left last October) in the next few
months. That should provide much-needed leadership for the salesforce,
which generates about 60% of Remedy's revenues.
The company's core business remains fundamentally sound. Pickrel points
out that even with the fourth quarter's earnings shortfall, Remedy's
margins and cash flow remained healthy. (Its operating margins are about
30%.) It also managed to boost its market share from to 24% from about 22%,
notes analyst Sarah Bernstein at Wheat First Butcher Singer. That's still a
big lead over the number-two player in the help-desk software market,
Peregrine Systems, which has a 12% share, according to Bernstein. And
Amerindo's McDonald points out that demand for anything related to network
management is still extremely robust.
And at the stock's currently depressed price levels, the company may even
become a dark-horse acquisition target for big software firms that
specialize in network management, such as Computer Associates, which just
abandoned a hostile takeover bid for Computer Sciences.
But even if that doesn't happen, Remedy's fans say the stock has little
downside risk from its current depressed levels. At 17, the stock trades at
roughly 15 times analysts' consensus 1999 earnings estimates of $1.15 a
share, according to Zacks Investment Research. That's a big discount to its
expected earnings growth rate for next year of about 29% and its projected
five-year growth rate of nearly 33%.
"There's room for significant price appreciation," argues H&Q's Pickrel,
who has a Buy rating on the stock.
If Remedy can reassure investors that the fourth quarter of 1997 was just
a glitch, and if it can resume the earnings growth Wall Street came to
expect, then another "law" of technology investing should kick in: What
comes down can definitely go up again.
BARRON'S Online Weekday Trader is located at
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