Why Datawatch Corporation Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Datawatch Corporation (NASDAQ:DWCH) dropped more than 18% during intraday trading Tuesday, then recovered to close down just 7.4% after the company turned in solid fiscal fourth-quarter results.

So what: Quarterly sales rose 47% year over year to a record $8.82 million, which translated to an adjusted net loss of $0.08 per diluted share, compared to net income of $0.08 per share in the same year-ago period. Analysts, on average, were looking for an adjusted net loss of $0.14 per share on sales of just $7.53 million.

However, as fellow Fool Sean Williams pointed out recently, the stock had experienced a sensational run going into the report -- having more than tripled from its 52-week-low set back in February --  so it would have needed to post a significantly larger "beat" to justify its lofty valuation.

Now what: While it's hard to fault the company's good quarter, remember management was also forthright during the subsequent conference call by warning it expects its relatively small revenue stream to be "lumpy for the foreseeable future." With the stock currently trading around 22 times book value and 50 times cash flow, I'd prefer to stay on the sidelines until Datawatch's results are a little more predictable.