Forget the Fed! This Fundamental Story Merits Your Attention

The market appears to be finding its feet this morning after it was staggered by a Fed-related sell-off, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.4% and 0.34%, respectively, at 10:10 a.m. EDT.

I've argued since Wednesday evening that the Fed's announcement that it expects to begin reducing its bond purchases this year is a catalyst for normalization and the opportunity for the market to focus on underlying equity fundamentals, rather than the Fed's policy experiments. In order to practice what I preach this morning, I'm highlighting a potential fundamental opportunity that may not be getting the attention it deserves, what with the intense focus on the Fed and the ensuing global share rout.

An interesting fundamental story
Yesterday afternoon, enterprise software provider Oracle (NYSE: ORCL  ) announced results for its fiscal fourth quarter ended May 31. Earnings per share were up 5% (excluding items), and the company announced a doubling in its dividend to $0.12 per share and an additional $12 billion for its existing share-repurchase program. The market's reaction? Unimpressed, to say the least: Shares are down 8.6%. What's the problem?

EPS of $0.87 was exactly in line with the consensus forecast, so that wasn't a factor. More telling, however, was the top line: Oracle's revenue was stagnant for the second quarter in a row, which is particularly troubling given that its fourth quarter is typically its strongest in terms of sales.

In raising its dividend and its share buybacks, Oracle was clearly responding to the new tone in the technology industry, exemplified by Apple's plan to return unprecedented amounts of capital to its shareholders. But an annual dividend of $0.48 puts Oracle's dividend yield at 1.45%, based on its raised quarterly dividend and yesterday's closing share price -- which is still significantly below the market's dividend yield (and barely more than half of Apple's, which is 2.8%).

Nevertheless, yield-starved as investors have been, they may have forgotten that income is not the only reason to buy shares. At just 11.4 times the estimate of the next 12 months' EPS -- and that's before accounting for this morning's drop in the stock price -- Oracle's valuation leaves room for capital appreciation. The company may have disappointed this quarter, but today's entry point could set investors up for an upside surprise in the future.

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