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7/11/2003
07:05 PM
William Schaff
William Schaff
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Taking Stock: Fundamentals Don't Support Market Gains

There always seems to be some scapegoat for the disappointment.

What an amazing July day--explosions, surprises, and smiles all around. No, not Independence Day, I mean July 7. The Nasdaq Stock Market could hardly have been a happier place. If it was a technology-related stock, the price was moving big--upward, in most cases. Even big tech names were moving as the Nasdaq 100 Index rose 4.1% for the day.

A positive outlook on the technology sector, tech stocks that are rising faster than the market, and money-market interest rates that verge on zero aren't hurting the situation. But do the companies' fundamentals support such a strong rise? An early indication would be the companies that did early announcements of their earnings for the calendar second quarter. Most of these announcements will be finished by the end of this week. But last Monday may have given an early clue as to whether we're getting too speculative with our money again.

BMC Software, an enterprise-applications-management company, was down more than 8% for the day as it warned of weaker-than-expected revenue and earnings for its fiscal first-quarter 2004, ending June. It blamed delays in purchasing decisions by its larger business customers. This doesn't bode well for large business-applications sales.

Two other enterprise vendors blamed lackluster IT spending for their warnings of poor results. FileNet, a provider of Web content-management software, said its second-quarter earnings per share would be less than expected because several large transactions it expected haven't come through. SeeBeyond Technology blamed a second-quarter 2003 shortfall on lack of any improvement in the enterprise-integration market. Its president of North American operations resigned to pursue other interests.

There's always some scapegoat for the disappointment. Cirrus Logic, a manufacturer of semiconductors for consumer electronics, said its fiscal first-quarter revenue would be at the low end of its previous outlook and, subsequently, its CFO resigned. I guess that's why it's taking such a large charge to earnings but not including it in operating earnings per share.

You'd think a sector such as security might be safe, but there always are exceptions. Take WatchGuard Technologies, a provider of Internet security software focused on firewalls and VPNs. Its business focus is primarily on small to midsize companies, so its early warning doesn't bode well for either large- or small-business IT spending.

Not all the news was bad. Websense expects to top revenue and earning-per-share guidance for the second quarter. It provides software that lets companies manage employee productivity by managing the way employees use the Internet.

Technology share prices haven't been dimmed by any of these early announcements. Short-term investor optimism is too strong, and fundamentals only seem to get in the way of making money. My warning: Keep your wits about you as others are losing theirs.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with nor does it receive compensation from any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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