Wall Street today is like a field of battle littered with wounded tech stocks shot down by disappointing earnings or, in the case of most Net stocks, no earnings. If stocks were people, this would be a tragedy. But they are not, and this unpleasant sight in fact offers opportunity for investors.Fallen angels. Turnarounds. Call them what you will, good companies that have stumbled and been trampled by the mob should always be considered by real investors. They can be home runs. They can be utter strikeouts. But if you are going to make money over the long haul, you need to move when the market offers you the chance. You should learn how to spot beaten-up stocks -- typically down at least 50% from their peaks -- that can recover. Tech today may offer such opportunities.
The Crucial Competitive EdgeFirst, make sure the company still has its competitive edge. "Because we are growth investors, we find ourselves often in looking in the technology area," he says. "Because technology changes quickly, we are trying to find companies that despite their recent problems retain a unique, proprietary business franchise. The technology must still be cutting-edge. "If the company still has the best technology, then there will not be a lot of competition and pricing pressure," he goes on. "That gives management financial breathing room to fix the problems. They can spend more on R&D and reallocate capital within the business without murdering profit margins." This is especially important when investing in tech, where rapid change is a constant. A company can stumble and never recover. He has a watch list of companies that had terrific businesses before the stumble and may still. He has, for instance, taken small positions in two troubled software companies -- Legato Systems (LGTO) and Citrix Systems (CTXS - Get Report).
|A Pair in Pain, but With Prospects
Legato Systems and Citrix Systems, one year
A Board That Cans More Than PeachesCitrix, he says, exemplifies another thing he looks for -- a board that moves quickly to solve the problem. "CTXS announced disappointing earnings about a month ago," he says. "The board immediately revamped management, which was the right thing to do. They responded immediately. One missed quarter and they shook it up. This company sells software that allows multiple users to use Windows NT on a single server. This had been a great business with great operating margins -- around 40%. "I think they can fix the problems facing them in part because they have the financial cushion, but also because the board has moved quickly to solve the problem."
The Ability to ReinventA third thing he looks for is a company that can reinvent itself. "If a company's basic business is dead, they have to abort and go forward with something cutting edge," he says. "One company that has done that I think can do that is Parametric Technology (PMTC), which was famous for its engineering CAD-CAM software, a business that has matured. But the company has a new product called Windchill, Web-based collaborative design software, a state-of-the-art product that uses the Net to link design with manufacturing and purchasing. They hope it will provide the growth going forward, and I think they have a good chance of succeeding."
|Time to Adopt the 'Metric System?
Parametric Technology, one year
Earnings Disappointments, but Not Too BigHe also looks for stocks with "minor" earnings disappointments. "Make sure it is minor," he says. "The trick is to make sure that it is not simply the first of many problems. That is not always easy to do. It takes work and time. But the beauty of fallen angel investing is that these stocks rarely snap back immediately. It takes months or a year once a company disappoints. So you have time." One smashup du jour that intrigues him is Pinnacle Systems (PCLE). Pinnacle plunged 59% Tuesday after the maker of video-editing tools reported profits about half what analysts had expected. It edged back up 2.7% Wednesday.
|For Now, Far From the ... You Know
Pinnacle Systems, one year
A Web Full of Fallen Angels -- Which to Buy?You might wonder what this guy thinks of Net stocks. He is looking at them on a case-by-case basis. Right now, he is looking at shares of Internet-based employment recruiting companies. "I think it makes sense for classified ads to move to the Net," he says. "The Internet is efficient for this purpose. And I think the job market will remain tight. All the stocks are well off their highs." His picks? HotJobs.com (HOTJ) and CareerBuilder (CBDR).
|Na-Na Na-Na, Na Na Na Na Na -- Get a Job
CareerBuilder and HotJobs.com, one year