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By: Joshua Reider

Despite reporting strong earnings and revenue for the 4th quarter of 2012, EMC Corporation (EMC) warned shareholders that the company is facing macroeconomic headwinds in 2013, which may prevent its customers from upgrading their information technology systems. This may not bode well for EMC's prospects and share price for the remainder of 2013, and investors may want to stay away for the time being.

Further, EMC owns a large interest in VMware, Inc. (VMW), which has also had some problems lately. VMware recently experienced a massive downward one-day share price move after releasing earnings on January 29th. This drop took out over $9 billion in market capitalization from VMware.

However, despite the cautious guidance provided by the company, some hedge fund managers have demonstrated faith in EMC's shares. Steve Cohen of SAC Capital increased his firm's ownership of EMC by over 3 million shares according to its most recent 13F filing. (See what other stock moves SAC Capital has made.)

Following the so-called "hedgies" is important - historically speaking, imitating hedge funds' top picks has outperformed the market by 2 percentage points annually, and their most popular small-cap investments generate an outperformance of more than 15 percentage points a year compared to the SPY (see details here).

Getting back to the crux of our analysis, EMC has a significant presence in cloud computing, which seemed to be a buzzword among many tech investors in 2012. The company has been focusing on increased innovation and capabilities in areas like scale-out architectures, virtual provisioning, flash storage and compression. EMC has been integrating its product line with solutions offered by VMware, and it has stated this integration has helped companies reduce operational and capital expenditures.

As noted previously, EMC reported strong revenue for the 4th quarter, as well as for all of 2012. Revenue for the 4th quarter was over $6 billion, compared with $5.5 billion for the same quarter in the prior year. Revenue for full-year 2012 came in at $21.7 billion, compared with $20 billion for 2011, an increase of 9% year over year. Even with the cautious guidance EMC provided, the company still predicts increased revenue of $23.5 billion for 2013. Thus, it appears that the company could be setting itself up to beat estimates in subsequent quarters by setting the bar lower with the latest announcement.

Much of EMC's valuation is based upon its ownership interest in VMware. Even though VMware went public in 2007, EMC still retains an approximately 80% ownership stake in the company. VMware's issues may be potentially bleeding over to EMC. VMware's stock price took a one-day nosedive of over 20% on extremely high volume of about 28 million shares when it released earnings on January 29th.

The company had some positive news with overall 2012 revenue increasing 22% to $4.6 billion, and with licensing revenues up 16% (yoy) in the fourth quarter to $597 million. Further, the company predicts increased revenues for 2013 within a range of $5.230 billion to $5.350 billion, representing an increase of approximately 14% to 16% versus 2012.

Still, it announced in the same earnings release that it would cut about 900 jobs from areas it is reducing its focus on as it moves forward. The market took a dim view towards this news with the massive sell off. Some hedge funds may have incurred some losses with the substantial share price drop.

Ken Griffin of Citadel Investments increased his stake in VMware according to its most recent 13F filing, but may liquidate or otherwise reduce his position in the company, as the fund has done with other non-tech holdings. (See what other stocks Griffin is selling.) Christopher Lord of Criterion Capital also increased his holdings in both EMC and VMware.

When looking at its earnings valuation, EMC sports a 6% discount in comparison to the data storage industry average, and shares trade at a mere 11.9 times forward earnings. VMware, meanwhile, is almost twice as expensive when using this metric, but the same cannot be said for smaller peers Seagate Technology (STX) and Western Digital (WDC). Both STX and WDC trade near 6 times analysts' year-ahead EPS estimates.

Factoring growth into the equation - the sell-side expects EMC to grow its bottom line by an average of 12.7% a year over the next half-decade - we can see that the stock is close to being considered "undervalued." EMC currently trades at a PEG of 1.04, below WMware (1.16) and Western Digital (3.99).

From a technical analyst's perspective, EMC's longer-term share price action seems stuck in a rut. Coupled with some recent volatile trading days, there are a number of technical red flags for investors. The price hit a yearly high of $30 per share in March of 2012, with a low of $22.77 in May of 2012. Since the first of the year, there have been some large drops in price, including an intra-day drop of 3.9% on January 2nd, and a drop of nearly 4% on very high volume of 133 million shares when it reported earnings on January 29th. The price has recovered somewhat since then, but it is still trading below its 200-day SMA.

There is a long-term symmetrical triangle pattern in which the price appears to be consolidating, with short-term resistance around $25. However, as stated previously, EMC may have been purposely providing lower expectations for 2013 in order to set the stage for positive news in subsequent quarters, whereby an upside breakout from the triangle pattern may be possible later in the year. Still, investors should remain wary by keeping an eye on news from both EMC and VMware by continuing to monitor the price action of each stock.

Source: EMC: Should Investors Avoid This Company For The Remainder Of 2013?