Downgrade Debate at Internet Security

Weinfeld issued his first sell rating on ISSX on Jan. 23, a day after the stock closed at $20.47. He raised the rating to neutral based on valuation on Feb. 24, when shares fell into the $12 range. Weinfeld said the stock's current valuation, trading at 25.8 times his 2003 estimate and 22 times his 2004 estimate, is expensive. He set a price target of $10.

Weinfeld believes ISSX can meet third-quarter consensus estimates, which peg earnings at 11 cents a share on $59.2 million in revenue, according to Thomson First Call. But he said he is concerned about the company's fourth-quarter pipeline and its ability to win new customers with a recently launched, unproven intrusion-detection appliance. Analysts are forecasting that the company's revenue will grow 10.8% in the seasonally strong fourth quarter.

"As consolidation is rapidly taking place in this industry, to be a long-term winner, ISSX must, we believe move away from just the best-of-breed approach and show a greater vision in the next year or two beyond a multiclass appliance that may not work," Weinfeld wrote.