This article yesterday from Market watch is worth a second look :
( ITRU and HLIT may make small shorts at
some point today, and DIGL long at some point? ;-)
Will top-of-heap software stocks fall?
cbs.marketwatch.com.
SAN FRANCISCO (CBS.MW) - Who dares to disagree that the software companies that can slash Corporate America's business costs will reap the biggest stock rewards of 2001?
Not Wall Street analysts, it seems. They're still steering investors to a handful of software names they say are on the "must have" list for information-technology managers. Those companies include sales software maker Siebel, storage expert Veritas, transaction-processing applications company BEA Systems, and security wonk Check Point Software. See MarketWatch's Mike Tarsala report.
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1/31/2001 5:40:56 PM ET
Only one of the 21 analysts who cover Siebel (SEBL: news, msgs), BEA (BEAS: news, msgs) and Check Point (CHKP: news, msgs) give any of the stocks less than a "buy" rating, according to Zack's Investment Research. Just two in 20 who cover Veritas (VRTS: news, msgs) give it less than a "buy."
Fundamentally, there are obvious reasons to love all four stocks. Each of the Wall Street darlings is a leader in its respective market. Each should return revenue growth rates at or above 50 percent in 2001. Earnings? FuhGet about it. We're talking about per-share profit growth near 40 percent for Siebel to as much as 118 percent for BEA this year.
But investors may want to take the analysts' software picks at their own peril, according to some money managers and investment gurus. Whatever the analysts say, it's not time to buy, according to the experts whose firms don't profit directly from stock sales to individual investors.
"They're outstanding companies, but they've already had such strong moves, and the price-to-earnings ratios are still up there," said Bill O'Neil, long-time investor and founder of Investor's Business Daily. "It's hard to see them suddenly taking off and leading the market."
There seems to be little added safety in the super software stocks, as their abnormally high prices could make them among the first shares that tank if recession threats get worse. The market's proven in the past 10 months that it won't spare valuable stocks such as Oracle (ORCL: news, msgs) and Sun Microsystems (SUNW: news, msgs) if the companies hint at slower growth rates.
Judging the expense of Siebel and the other stocks is in many respects a matter of opinion. But investors consider most software issues with price-to-earnings ratios above 100 to be expensive, says Kay Doremus with Banc of America Capital Management. While Check Point's PE ratio comes in under the threshold, the rest don't: Siebel has a PE of 102, Veritas has a PE of 115, and BEA's PE is a whopping 284.
The other multiple commonly used is a company's PE/Growth ratio, which also factors in earnings growth. The average software PE/G ratio is in a range from 1.5 to 2, Doremus says. But Check Point's is 1.7, Veritas and BEA come in at 2.4, and Siebel's stock is an even more pricey 2.7.
It's true that the best stocks in every industry trade at a premium. There's a price to pay for stellar growth, and current shareholders are among those that say Siebel and the rest can justify their cost.
O'Neil recommended so-called expensive stocks including Cisco Systems (CSCO: news, msgs) throughout the 1990s, while others passed on it. He said that his investment company's made money on stocks that trade with earnings multiples as high as 300.
So what of Siebel's multiples? The company seemingly should be on fund managers' A-list, right?
Siebel breezed through its December quarter with a two-fold sales increase. Pro-forma earnings that quarter increased 176 percent to $106 million from $39.2 million. The company's operating margin in the quarter increased to 27.2 percent, up from 20.2 percent in the year-ago quarter.
Long-term, Siebel's appears to be a poster child for all software companies. Its core market opportunity should grow to $12 billion in 2004 from $4.6 billion last year, according to International Data Corp. The company is expected to increase revenue 50 percent over the next three years. And Siebel continues to gain market share against hostile competitors.
All the others -- Veritas, BEA and Check Point -- also live up to their incredibly high growth rate standards. Veritas also is expected to increase revenue 50 percent for three years. BEA is expected to increase sales about 40 percent over the same period. Check Point can count on similar high growth rates.
But the question investors are asking increasingly is if the software companies can come through with expectations over multiple years. In light of overall tech market conditions, a growth rate hiccup in the near future could mean hell to pay for shareholders.
"These guys are totally off on their own," said Larry Seibert of Barrett Associates, who controls about $2 billion of investments for private client accounts.
There's a right time and a wrong time to pony up for pricey stocks, according to O'Neil. Now isn't the time, when it comes to software. He uses technical analysis, or stock price charting, as one of many factors to pick winners. And as of now, the charts are telling him to stay away from software.
Investors should buy strong-growing stocks that break out of a narrow trading range over week-long periods, O'Neil contends. But most software concerns, including Siebel, BEA, Veritas and Check Point, have yet to settle into a base trading range that will allow them to run up. Siebel has ranged from $100 a share to less than $50 a share in the past two months, and now trades near $71. BEA's shares range from about $81 to $41 over the same period, and now trade near $68. Veritas and Check Point's prices also showed volatility recently.
What's more, it's important to track money rotation, he contends. The big money is going to financial stocks and a handful of old economy names that recently have been overlooked. Software is out, -- at least for now.
There's a lot to be said for stocks that hold up in times of adversity. For that, Siebel and the rest get credit. The question is whether the stocks can keep going without a growth-related slip.
And if they do slip, is the overall tech economy worse off than the stock-touting analysts now are saying?
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 10:10 AM ET Jan 31, 2001 NewsWatch
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