Last week, I published an article discussing that big IT firms were seeing huge gains on news that Europe was working toward a solution to its continuing crisis. However, in the article, I also cautioned that, while news in Europe might raise markets one day, "the see-saw of optimism and negativity in Europe will continue driving large price swings."
Today, we the other side of that see-saw -- across the board, big tech stocks saw huge losses.
Not so bad for big tech stocks
The interesting caveat of today’s moves was the type of tech stock affected. Big names like Apple
But horrible for niche network plays
Yet, while big tech stocks managed to hold onto manageable gains today, any IT stock that falls under the "growth" category was absolutely crushed today.
Source: S&P CapitalIQ
As you can see, a host of companies with huge P/E multiples saw big losses on the day. The big overriding catalyst continues to be that Europe is weighing on the industry. There’s little ability to forecast future demand, so IT departments are holding back on big programs, and that’s causing huge pains.
However, those pains are centered in the smaller innovators whose products are often considered more discretionary than "mission critical" projects with existing vendors like IBM. Today, specific pain was brought on by Acme Packet
To me, neither drop was a blanket condemnation of the technology industry. Acme has long failed to live up to expectations, failing to live up to its potential quarter after quarter. While it missed expectations last quarter, rivals like F5 networks have seen their telecom business continue to grow at outsized rates. Acme’s results in the second quarter might speak ominously to F5 in the short term, but in the long term, the fact that a company like F5 continues to grow its telecom business at such a rapid rate is a much more compelling storyline. With F5 down 33% from its 52-week high, I’ll put it on my watchlist as a company that should continue seeing bumps and bruises as Europe plays out, but has long-term advantages in a compelling field.
Meanwhile, Informatica’s miss was pretty stunning. The company was expected to pull in $217 million in revenue, but put its top-line around $189 million in the second quarter. I’d be more concerned had the company not authorized a $100 million buyback along with the results. It seems management is pretty confident in the company’s ability to turn back on the growth engines when IT budgets comes back online.
The miss from Informatica, and surrounding downgrades to big IT, led to huge losses in companies like VMware and parent company EMC. I agree that these results could spell near-term headwinds, but at current multiples -- especially for EMC -- I think the upside outweighs the downside.
Remember that big price swings could continue. Yet, as we saw both last summer and in the depths of 2009, finding companies with long-term advantages at the depths of market pessimism can lead to stunning outperformance. I think we’re due for a stressful earnings season ahead, but all the same, I’ll be looking for some companies that could see more drops, but are poised to outperform over the long-haul. I’ve already bought EMC, but I’ll be circling F5 Networks if the company keeps dropping in the weeks ahead.
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