Taking Stock: The Companies To Buy Are Those People Hate

Do you sometimes read the newspaper and wonder what happened to all the rational people? You're not alone. In the investment world, one could easily argue that between emotion and logic, emotion will rule the day.

For example, I was talking to some of my colleagues the other day about the logic of semiconductor stock behavior. Clearly, the recent bad-earnings news from Advanced Micro Devices, Cypress Semiconductor, and others hit the market hard. Technology stocks, in general, have been rallying, especially semiconductors, as the sentiment by many investors and traders was that the current earnings news was so bad, it couldn't possibly get worse. In other words, they were trying to time the exact bottom for the price decrease of semiconductor stocks.

The problem, as I see it, isn't the speculators. They're the people who make liquidity in this market with the daily betting on stock direction. What always amazes me is that some very bright investment people, instead of basing their decisions on facts and fundamentals, vote with their emotions. There's a range of valuations and different valuation metrics, not all exact, that patient investors can use to help guide whether to buy or sell. I see too many of the so-called professional investors jumping in and out of technology stocks based more on fear and greed than rationale. Maybe this wouldn't bother me so much if they weren't paid so much money.

In other recent news, some Wall Street analysts are predicting the death of enterprise software. Enterprise software is far from dead, in my opinion. There may be less innovation than during the boom years of the late '90s as many businesses struggle to adopt the new technologies created in the prior cycle. However, innovation goes on. I heard an interesting data point the other day. A major venture-capital firm had most of its partners working on health-care startups, primarily biotechnology and devices, and only one partner working on enterprise software. This bodes well for the current software vendors, as future competition may be limited.

I'm not saying that enterprise software companies are going to grow by leaps and bounds; companies that have historically emphasized the mainframe side of the business such as BMC, Computer Associates, and Compuware are having a hard time growing their top lines at all. However, distributed companies such as BEA Systems, SAP, Siebel, and Veritas are still making headway. Oh, yes, even that little company called Microsoft was able to realize double-digit revenue growth last quarter. Isn't it surprising that Siebel Systems, which many investors had given up for dead, announced an upside in new licenses and the stock jumped more than 20% on the day? So much for efficient markets.

Enterprise software spending will continue in cycles, like any other business. We may be in a soft patch right now, but I believe demand will recover. Just remember to buy the companies when people hate them. In my opinion, small, forgotten companies such as Chordiant Software and Opsware may start looking a lot better in the future.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. 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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