The list of software stocks battered by skittish investors grew longer each day this week.

On Thursday, Symantec ( SYMC), the maker of Norton anti-virus products, became the latest addition to that list, after a two-man boutique research firm in New Jersey issued a sell recommendation on the stock. The day before, McAfee ( MCAF), VeriSign ( VRSN) and Computer Associates ( CA) shares were hammered. PeopleSoft ( PSFT), meanwhile, has steadily declined since the beginning of the year as the share prices of its enterprise software competitors have increased.

Accounting jitters lay at the heart of each decline. The concerns often have centered on old information, were sometimes disputed as invalid or even defied explanation. In Symantec's case, Summit Analytic Partners issued a sell rating and shares dropped, ultimately closing off $2.42, or 6.8%, at $33.22. The selloffs offer yet more evidence of how skittish investors have become in the aftermath of Enron.

But is it mere coincidence that so many software companies are getting hit? Sure, companies in other industries have suffered in the Enron fallout. But the trend toward consolidation among software companies, combined with some accounting quirks in the sector, makes them more susceptible to Enronitis.

"Any company that has done acquisitions, that has affiliates of any types, that is more complicated -- anything that falls into that category seems to be getting hit," said Tim Gaumer, senior equity analyst at Transamerica Investment Management. "What people are looking for are simple and easy-to-understand businesses."


A Week to Forget
Accounting issues have sparked steep drops in some software stocks.
Company Feb. 1 close Feb. 7 close Percentage change
Symantec $37.68 $33.22 -11.8%
McAfee 22.50 16.50 -26.7
VeriSign 31.00 24.10 -22.2
Computer Associates 34.28 27.69 -19.2
Nasdaq Composite 1911.24 1782.11 -6.7
Source: Baseline

But Gaumer said the recent slide shouldn't scare off investors. "The market's recovery following 9/11 should reinforce the message to investors that buying in times of crisis is almost always the right thing to do," he said. "What the market is doing now is having a crisis of confidence."

One company he thinks may be receiving an unwarranted blow to its perception is VeriSign.

The Mountain View, Calif.-based domain registry and security firm suffered a 9.5% drop in its stock Wednesday amid rumors surrounding its acquisitions and affiliates. Investors were reacting to rumors that VeriSign artificially inflated revenue by investing in some of its 48 global affiliates and then receiving royalties back from them. In the past, there have been concerns that acquisitions, rather than an expansion in the company's businesses, are at the heart of the company's growth.

Analysts stood by VeriSign as its stock slid on the rumors, suggesting that investing in affiliates is not an unusual practice, and attributing acquisitions to consolidation in the industry.

Timothy Leehealey, an analyst with Wedbush Morgan Securities who has a buy rating on VeriSign, questioned the logic of investors assuming the worst about acquisitions. Still, he acknowledged, "I don't think it's a bad place to start looking because when you have acquisitions you have an opportunity for flexible accounting."

Another acquisitive company, Computer Associates, also was hammered Wednesday, after Moody's Investor Services announced it would review the company's bond rating while Computer Associates was in the middle of a $1 billion bond placement, which it subsequently canceled. Shares in Computer Associates fell 13.5% Wednesday.

In a conference call, Computer Associates CEO Sanjay Kumar repeatedly asserted there had been no new information released to prompt a change of heart at Moody's. The bond issue was meant to reshuffle debt to take advantage of lower rates, he said.

However, Computer Associates in the past has been criticized for the confusing way the company recognizes revenues: prorated over time, instead of when the money is first received.

"Software has its own accounting issues just inherently with revenue recognition, whether you record up front rather than ratably," said Kevin Trosian, an analyst with Banc of America Securities who covers security software companies.

Trosian also believes the recent decline hitting software stocks may be investors taking profits. "I think more software outperformed the market since Sept. 11 and so from that standpoint I think that people are looking at valuations," he said.

One company whose stock is trading at post-Sept. 11 levels is PeopleSoft.

Investors have avoided buying PeopleSoft shares because of questions about the Pleasanton, Calif.-based software maker's plans to buy back Momentum Business Applications ( MMTM), a company it spun off in 1998. Investors have suggested the arrangement was designed to shelter PeopleSoft from research and development costs. PeopleSoft shares are currently trading at about $29, about the same as Sept. 14. Oracle ( ORCL) shares have increased by about 40%, while Siebel ( SEBL) has soared by 68% over the same period.

PeopleSoft plans to close the acquisition this quarter, but company spokesman Steve Swasey noted that PeopleSoft has been talking about buying back Momentum since the middle of last year.

And then there's software security company McAfee, whose shares declined 22% on Wednesday for no obvious reason. Summit Analytic managing partner Richard Williams, who issued a buy rating on McAfee Thursday, told Dow Jones that he feared the drop was caused by concerns over the company's reclassification of an expense.

However, that explanation didn't make sense to McAfee CFO Evan Collins, who said that the company made a point of explaining the reclassification -- of less than $10 million -- on its earnings call and in its press release on Jan. 16. Collins noted that the reclassification had no effect on operating earnings.

"It doesn't impact cash or anything. That's what's kind of a little disconcerting about it," Collins said. He wondered if investors misunderstood and thought McAfee was restating expenses rather than merely reclassifying them. "I'm not sure the average investor understands the difference between a reclassification and a restatement," he said.

But that explanation doesn't quite work either because that would mean the reaction came weeks after the initial news. "There's no other news out there," said a flummoxed Collins. "It's weird when the stock goes down and there's no news."

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