The Internet Can't Function Without this Stock
Thursday, June 28, 2012 10:00 AM
I'll never forget trading during the Internet boom of the late 1990s. Internet-related stocks would sometimes jump two or more points at a time, from tick to tick, as crazed investors just poured money into the latest big thing. Even stocks with no revenue and a questionable business plan would rocket to shocking valuations due to the frenzy.
Everyone from my local barber to the mail delivery guy began to ask me questions about the market during those heady days. They all wanted a piece of the action. Stocks just kept climbing higher and higher until the bubble burst.
Students of market history knew this frenzy couldn't last. It was akin to the tulip bubble that held Europe in its grasp during the 1600s. When the Internet bubble burst, billions of dollars were washed out of investor accounts who decided to hold, on or worse yet, average into losing positions without a clear plan. All of the questionable companies closed their doors, and to this day, the stock market has not reached the heights it did during the Internet bubble.
Fortunately, certain companies that were created right at the start of the Internet frenzy had solid business plans and ideas built to last. These companies often don't get the spotlight like the glamour firms such as Facebook (NYSE: FB). But many of these companies are the backbone of the Internet. In other words, they are the behind-the-scenes players that make the Internet function as opposed to the consumer-focused Internet firms we all know about.
Recently, my research led me to one of these backbone-of-the-Internet companies that I think has strong upside potential: is Brocade Communications (Nasdaq: BRCD).
Brocade was launched back in 1995 and is a pioneer in storage area and IP networking products. Basically, these products enable communication between storage devices and servers as well as Ethernet switching and routing. In other words, the Internet doesn't function without these products.
Total net revenue for the company was down 1%, to $543 million in the second quarter. However, it earned $0.08 per share, up from $0.05 from the previous year's second quarter. Brocade's Ethernet business slipped 10% in the most recent quarter, yet the storage business increased by 3%.
Technically, the company has been knocked down 27% in the past year, although has bounced since the CEO purchased his shares. The price is slightly below both the 50 and 200-day simple moving averages but appears to be building a base in the $4.70 range.
Putting it front and center on my radar screen, CEO Michael A. Klayko recently purchased 60,000 shares of the company, adding to his earlier purchase of 50,000 shares on June 5. All in, with direct and indirect holdings, Klayko has built his stake to about $5 million in his own company. While this may not seem like much, let me explain…
This CEO is not a hands-off, let the other guy do the work-type of leader, which makes these purchases a clear signal for investors. As an example, the head of sales at the company left recently. Klayko stepped into this role temporally. So here we have a company that posted mediocre performance in the most recent quarter and a head of sales who flew the coop, yet the CEO is investing his own, hard-earned money in the firm? To me, this is a clear sign of a CEO who truly believes in his brand and is willing to put his money where his mouth is. I like investing in companies with CEOs that show this kind of commitment.
Risks to Consider: The company is highly dependent on partners such as EMC (NYSE: EMC), Hewlett Packard (NYSE: HPQ) and IBM (NYSE: IBM) for a substantial piece of its business. Not to mention having large and aggressive competitors such as Cisco (Nasdaq: CSCO) in its space. In addition, being sensitive to the global slowdown woes adds unknown factors to the future. Always position size correctly and use stops when trading.
Action to Take --> I like this company and I like its business. It represents an opportunity, however, I would only be a buyer on a break-out above $5 since I want this one to prove itself prior to risking any funds.
- David GoodboyDavid Goodboy does not personally hold positions in any securities mentioned in this article.StreetAuthority LLC owns shares of CSCO in one or more of its “real money” portfolios.