The cover story in this week's
discusses the highly competitive enterprise software industry. I have profiled the companies presented in that story to determine which, if any, qualify as candidates for a long-term technology portfolio at this time.
First, consider the backdrop against which we view these companies. The
appears to have peaked, with the four-year high of 2219 set on Aug. 3. The decline this morning occurs five weeks since that peak, and Friday's close below the five-week modified moving average at 2131 shifted the Nasdaq's weekly chart profile to negative.
The Nasdaq is below its 50-day simple moving average at 2137, which should provide resistance. The risk is to the 200-day simple moving average at 2074. The
is significantly below its 200-day SMA at 10,539, which provides a warning, and a close on the Dow on Wednesday below the five-month modified moving average at 10,445 would shift the monthly chart profile to negative.
Given these pullbacks, it is important to buy technology stocks that meet at least two of these three criteria:
- The stock must be at least 20% undervalued vs. a fair value calculation that incorporates the stock's 12-month trailing EPS, analysts' estimates of 12-month forward EPS and the yield on the 30-year.
Its weekly chart profile is positive, with the most recent weekly close above the stock's five-week modified moving average with a rising 12x3 weekly slow stochastic.
The stock must trade at or near a value level, which is a price at which I expect buyers to emerge. Value levels are based upon the past nine closes in several time horizons: weekly, monthly, quarterly, semiannual and annual.
My first step in analyzing
picks was to use my fundamental screen to find software stocks that were trading above $10 a share and were at least 20% undervalued. This resulted in a list of 32 companies. The software industry is 16.5% undervalued as a whole, so this was not surprising.
To shorten the list, I screened it again to find only those stocks that were 30% undervalued, which narrowed the list to 21 companies. Of these, five names were on the
list, which I present with my evaluation:
develops Internet security software for client networks. Its shares are 33.7% undervalued, and the stock's weekly chart profile is positive because it ended last week above its five-week MMA at $22.02 and 200-week SMA at $21.08. With Check Point on both
Cash Cow list and Buyout Bait list, and with shares trading above my quarterly value level at $21.93, this stock is a candidate for a long-term technology portfolio.
is a Cash Cow according to
and has been a momentum trade in recent weeks, but can it go even higher? The company provides data integration software for corporation-wide data management, and its shares are 30.5% undervalued.
The stock has a positive, but overbought, weekly chart profile, with its five-week MMA as support at $10.35. In the near term, Informatica's upside appears limited to a weekly risky level at $11.94, where profits should be taken. I show a monthly value level at $9.70, which would-be buyers should consider waiting for.
Next up is another stock that made
Cash Cow list:
Internet Security Systems
, which provides software to protect information technology infrastructures against Internet threats.
My model shows its stock is 30.7% undervalued, and it has a neutral weekly chart profile because it ended last week on the cusp of its five-week MMA at $21.95. The 200-week SMA is lower support at $18.71. I believe shares are likely to continue to move sideways as they are influenced by my quarterly pivot at $22.05 since the end of June. Buyers should be prepared to dollar-cost average at the 200-week SMA at $18.71.
is the most undervalued stock in the group. Shares of this
Cash Cow currently trade 35.8% below fair value, according to my model. The company, which develops software for database and application management, currently has a negative weekly chart profile, because last week's close was below the stock's five-week MMA at $13.49 and 200-week SMA at $13.57.
My model shows Quest currently in a trading range between a monthly value level at $12.23 and a weekly risky area at $13.72. Interested investors will want to enter the stock toward the lower end of that range.
The Cash Cow theme continues with
, which recently closed its acquisition of Veritas. The combined company brings together what I believe are the best software and storage products available. This should make this company a leader in the Internet software and services industry.
Its stock is 33.8% undervalued and has a negative weekly chart profile, with Friday's close below the five-week MMA of $21.58. My monthly value level at $18.05 is considered a price at which to add to positions.
A value level is a price at which buying should occur on weakness. A risky level is a price at which selling should occur on strength. A pivot is a value or risky level that was violated and has a high probability of being tested again in its time horizon as a magnet.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.