Software Stocks Go 'Round and 'Round, Landing Nowhere
It's happening.
The uncomfortable possibility that the software stocks you bought in April and May might give back their gains in June over earnings jitters is becoming a reality.
Microsoft
(MSFT) - Get Report
,
Oracle
(ORCL) - Get Report
,
SAP
(SAP) - Get Report
,
i2 Technologies
(ITWO)
,
Siebel
(SEBL)
and
BEA Systems
(BEAS)
are all exhibiting signs of being on the second leg of a round trip between somewhere higher and back down again.
i2, for instance, closed at $13.50 on April 3, before gaining 108% to close at $28.10 May 28. Friday, the stock closed 37% below that high, at $17.69. Oracle closed at $13.25 April 3, but ended at $20.32, or 53% higher, April 19. By the finish on Friday, it was down to $15 again, off 26% from that high. And Siebel gained 139% from its April 3 close of $23.04 to its May 21 finish at $54.97. It was back down to $40.07, or 27% lower, at the end of trading Friday.
Analysts, some of whom were uncharacteristically
cautious during the rise, now say these stocks are paying for their ascents, which were based more on unfounded hope than grounded fundamentals.
Looking on the Bright Side
"People were thinking that we had gotten past the bad news, and that things would turn up in June and September," says
Goldman Sachs
analyst Tom Berquist, who in April
lamented the inexplicable run-up in shares to
TheStreet.com
. But without any noticeable improvement in capital spending or technology budgets now, Berquist says software investors are paying for that unfulfilled prophecy. "The same things that caused problems in March are turning up and causing trouble here."
Signs of
slowing in Europe also are taking their toll. And investors' refusal to loosen their death grip on the bull market, all bets be damned, also is coming into play.
"There's still a bull-market mentality. People were generally very shell-shocked that the market had come down so much over the last year," says Ian Toll, an analyst at
Credit Suisse First Boston
, who cautioned investors in April that software stocks were still not cheap by historical standards. "There's a natural tendency to try to pick the bottom, even in the absence of any real evidence that fundamentals are improving. You see these kinds of little rallies get sparked when people go bottom-picking."
Thus, the mini-rally of the spring was inspired as much by fear of missing the upside as anything else. Of course, fear is always Wall Street's great motivator, and it's also likely inspiring the pullback in shares now. Software investors will wring their hands during Monday's trading session, waiting for Oracle to announce fiscal fourth-quarter results after the close.
While the company had been
widely expected to issue an earnings warning for that period, cautious words never came out of the company. Still, no one is expecting Oracle to provide a positive surprise.
U.S. Bancorp Piper Jaffray's
Jon Ekoniak says Oracle probably had to pull out all the stops just to squeak by.
Seasoning
"Because they're a more seasoned company -- and because they had such a
large miss last quarter -- they were really focused on the execution side, on cutting costs and on making sure that deals which slipped out of the previous quarter would get done this quarter," says Ekoniak, who rates Oracle a neutral. He took down his revenue and earnings estimates for the company May 31. (His firm hasn't done underwriting for the company.)
Oracle's quarter ended May 31, while most software companies won't shut their books until June 30. Because of that, Oracle's results are regarded as a glimpse of what's to come in software, and good or bad, they likely will influence the movement in these stocks.
Whether there will be any positive fundamental change to keep these stocks from falling further, however, is another matter. Just as investors' hopes for signs of improvement in June faded, so, too, has the uniform optimism that spending will be back on track by December. Observers still say the
Fed's
rate cuts must eventually have an impact on the economy, but the bounce-back timeline has now been stretched out.
"We've got questions now about whether the recovery comes in the second half of this year, or the first half of next year," says Goldman's Berquist. "Now you've got people thinking they might have to hold on to these stocks through bad news for the next couple of quarters, and that's not why they bought them."
Then again, if they bought them in April or May, they probably never had a clear idea of why they bought them to begin with.