The Internet has changed the way we live and work in many ways. Through it, we find information and resources, build platforms, create content, and increase productivity. Internet software and services can make our online lives more entertaining, educational, and safe—and Internet-related stocks can be quite profitable.
I’ve identified seven software and services stocks that were trading under $10 as of July 2008. The underlying fundamental data used to establish ratings and fair-value calculations come from industry sources. All seven stocks selected have a buy rating and are trading below their fair value. Fair value is not a price target but is where each stock should trade in a perfect investment climate. The stocks I’ve selected have a market cap of at least $100 million and an average daily volume above 250,000 shares per day.
Stocks between $5 and $10 are my main focus. Many mutual-fund managers can’t own stocks trading below $10. If there is a reason for a stock to fall below $10, expect to see selling pressure. Once the selling subsides, and if the stock stays above $5, some speculation is merited in stocks that still have positive profiles. If a stock falls below $10 and meets my guidelines, we have a favorable risk versus reward scenario.
Margin threshold stocks trade for less than $5 but more than $3. Many brokerage firms won’t allow their clients to buy stocks below $5 on margin. These stocks trade below $5 for a reason—their companies are at risk for bankruptcy. But unlike the next group, stocks that trade between $3 and $5 have a better chance of survival.
The options-on-survival group includes stocks trading in the $1-to-$3 range. Stocks in this category are option plays based on the company’s survival. Buy them only if you can afford to lose 100% of the investment because stocks become worthless at bankruptcy, which is a high risk for companies with stocks in this price range.
Stocks below $1 have drifted down from higher levels and are subject to de-listing. I will not look at these stocks.
Seven Software and Services Stocks
Actuate Corp (NASDAQ: ACTU) provides software for business intelligence, and performance management applications in the United States and internationally.
Entrust Inc. (NASDAQ: ENTU) provides software to secure digital identities on the Internet.
Epicor Software Corp. (NASDAQ: EPIC) develops customized business-to-business applications for back-office functions, as well as production and supply chain management.
Harmonic, Inc (NASDAQ: HLIT)designs video products and system solutions that enable service providers to deliver broadcast and on-demand services.
Novell Inc. (NASDAQ: NOVL) is another business software and services developer for information technology applications, including those using the Linux enterprise environments.
Sonicwall (NASDAQ: SNWL) designs network and content security solutions for small to medium size networks using e-commerce applications such as in education and healthcare.
TIBCO Software Inc. (NASDAQ: TIBX) provides infrastructure software to end-users around the world.
These types of Internet software and services companies protect users from spyware, viruses, spam, and web-based fraud. Without added safety, the changes in our lives resulting from the expansion of the Internet would not be as pleasant as they have been over the past decade. A few of these names have overlapping products and services, and thus can also be considered takeover candidates. This is always a consideration when buying and trading stocks under 10 bucks.
My strategy is to “buy and trade” using good-until-canceled orders to add to positions on weakness to value levels. Or sell on strength to a risky level.
• A value level is a price at which investors should add to positions on share-price weakness.
• A risky level is a price at which investors should reduce holdings on share-price strength.
• A pivot is a price that should be a magnet during the time frame specified.
Richard Suttmeier has been a capital markets professional for more than 30 years, previously holding positions at Bache, LF Rothschild, Global Market Consultants, Smith Barney, and RightSide Advisors. He holds Series 7, Registered Principal, and Investment Advisor licenses.
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