Insiders Sensing a Bottom at Stellent

There's money to be made when there's blood in the streets. That investing maxim would seem to apply to e-content vendor Stellent(STEL Quote), which has taken a beating but looks poised for an eventual rebound.

Shares of Stellent fell from $30 at the start of the year to below $5, before a recent rebound to $6.30. The stock was initially pressured after its third-quarter (ended in December) results caused investors to question the company's balance sheet. The stock took another hit when its fourth-quarter (March) results showed a sharp revenue drop.

But the fourth quarter also had a series of positive elements that should pave the way for a resurgence. In effect, management cleared the decks by writing off assets, stepping up collections to reduce bloated receivables, and lowering forward guidance down to levels that should allow the company to return to its past of estimate-topping quarters.

Software for Intranets

Stellent licenses software that allows corporations to port all of their documents onto company intranets (the company used to be known as Intranet Solutions). It's one of the few areas in the software sector that's showing strength, since it represents significant cost savings for customers.

Documentum(DCTM Quote), the biggest player in the space, recently delivered estimate-topping results and told investors to look for 10%-15% sequential growth on the heels of expanding interest from IT managers.

Similarly, FileNet(FILE Quote) delivered a strong quarter when compared to software vendors in other niches. In other words, demand in the sector is holding up well, and Stellent's problems have been company-specific.

There's reason to believe that Stellent is addressing the internal execution issues, though, and could regain its footing within a quarter or two. Until these last two quarters, Stellent had been growing faster than the rest of the sector as it increased its market share.

Stellent, Not Stagnant

To get back on track, Stellent is taking several steps. For starters, the company, which currently bags a paltry 11% of sales from outside the U.S., is boosting foreign sales efforts through the use of resellers such as Software AG and IBM(IBM Quote), as well as an expanded direct sales force.

On the domestic front, management has refocused efforts to ensure that smaller department-level deals are still closed, even as the company tries to bag more large, $1 million-plus accounts. Importantly, the company still signed 40 new customers in the March quarter, which was in line with previous quarterly averages. But smaller deal sizes led to the top-line shortfall.

Also important is that the company has managed to resolve lingering issues regarding the balance sheet, which is now much cleaner.

But even as management has "cleared the decks," we're not expecting a sudden, radical turnaround. The June quarter should be modestly higher, with meaningful sales increases only coming later this year.

It may also take that long for management's credibility to be restored. Right now, the company has zero credibility, as seen by the fact that its $130 million market capitalization is not much higher than the $96 million (nearly $4 a share) cash balance. The company remains debt free, and should still have more than $70 million in the bank when it hits break-even later this year, as projected. Stellent was profitable for eleven straight quarters before the recent shortfalls, so getting back to break-even quickly shouldn't be a stretch.

To get back into the black, Stellent needs to boost quarterly sales back into the low $20 million range. Break-even is currently $23 million, but further costs cuts should lower the bar.

Forecasting future levels of profitability is premature. Later this year, when the company gets closer to break-even, management will be able to give firmer guidance. But the stock already appears cheap on a price/sales basis. This multiple is one-fifth of the competition if you back out cash for all parties involved.

That's why the stock is attractive at current levels. Stellent has lots of cash, is in an attractive software niche, is taking the right steps to regain its footing, and is currently valued as if it's going out of business.

Insider Action

Three insiders seem to think similarly, and have purchased a total of $290,576 worth of Stellent at an average price of $4.71. President Vern Hanzlik bought $142,000 of that total. This was his first insider trade since he finished an extended bout of selling a year ago. Unwilling to hold on to any shares back when the stock still fetched more than $30, he is now building a position.

CFO Gregg Waldon was also a smart seller a year ago, and a recent buyer of 10,000 shares. Operations VP Mitchell Berg also bought in at these depressed levels.

Technically, the stock appears to have some support and likely found its bottom earlier this month. Stellent is now up about a dollar above insider buying levels, but not all that far in light of its fall from $30 in the last four months.

If Stellent weakened again, we'd be surprised to see it fall below the $4.21 low it hit earlier this month, considering the company's $3.96 per share cash levels. If that downside is still too much, set a stop loss at $4.50 or even $5 to really limit your risk. With a proper stop, which you should be setting on all your stocks in this messy market, the risk/reward profile of Stellent is worth taking advantage of.