Buying Brocade Will Pay Off for Patient Investors
The canary in the coal mine has a tough, thankless job. The poor bird can only get killed if the early warning system works at all.
That's what happened to storage networking specialist Brocade Communications Systems (NAS: BRCD) in August. The stock got slaughtered on Aug. 5 thanks to a pre-earnings notice that the third quarter wouldn't be any great shakes. The Ethernet division stared down the barrel of "lower-than-expected Federal revenue as well as a softer-than-expected IT spending environment" while the storage segment simply saw soft end-user demand.
Yeah, that happened at the very peak of the recent market panic, but Brocade suffered way more than rivals NetApp (NAS: NTAP) , EMC (NYS: EMC) , and Cisco Systems (NAS: CSCO) that day -- and the stock stayed down.
So when the company reported full results last week, most of that pain should already have been priced in. But even though the final $503 million in revenue and $0.09 of non-GAAP earnings per share were above the midpoint of the new guidance, the canary died again.
To be fair, Hewlett-Packard (NYS: HPQ) chose the same day to start taking steps out of the hardware business and really remake itself in the image of software-minded CEO Leo Apotheker. Brocade had been seen as a potential buyout target for HP, if that tech giant wanted to push further into its newfound rivalry with Cisco. Now Dell (NAS: DELL) is the only remaining potential sugar daddy for the little networker. Bidding wars are not in the cards anymore.
All of that said, Brocade keeps skimming near multiyear lows. Even without obvious growth catalysts or buyout potential, the stock looks priced for absolute misery at just 7.4 times forward earnings with hardly any shorting activity at all. It takes a patient investor to profit from a mispricing like this one, but at least the downside is nearly nonexistent. And how many stocks (or bonds, gold bricks, cash wads in your pillow) could you describe that way nowadays? Spoiler: not many.
Brocade is a bit player in the "big data" trend. Teradata (NYS: TDC) and others may be better positioned to gain from that paradigm shift, but it wouldn't hurt to brush up on this market-moving revolution. Just click here to grab a free report on big data -- it's entirely gratis and can help you make some serious money.
At the time this article was published Fool contributorAnders Bylundholds no position in any of the companies discussed here. The Motley Fool owns shares of EMC. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems, Dell, and Teradata. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. You can check outAnders' holdings and a concise bio, follow him onTwitterorGoogle+, or peruseour Foolish disclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.