Labor Day marks the end of the summer season; it also marks the beginning of conference season in the investment world. There are a number of investment conferences that are marked on my calendar. Two companies that I am going long as they go to their respective conferences and hold analyst days are Brocade Communications Systems Inc. (BRCD) and inContact Inc. (SAAS). I am looking for both stocks to break out above $6.00 as we hear them deliver upbeat news and make positive announcements. Here's why you need to be long:
Brocade Communications Systems Inc.:
I recently said go long Brocade into their earnings based on my expectations of a potentially large buyback and/or debt reduction. The company did not disappoint as it repurchased $45 million of its stock and paid down $40 million of its debt in the quarter. Brocade is now one quarter away from being net cash positive. It has been four years since its acquisition of Foundry Networks via a $1 billion note and its last net cash positive quarter. As a result, its shares traded higher post earnings call. I believe the shares are set to rally to $7 - 7.50 in the next 30 days with limited risk on the downside. Here's why:
- Citi Technology Conference on September 6. This is the first investor conference after the summer doldrums. Investors could be invigorated when they hear how strong BRCD has finally become in its markets.
- Brocade will host its Analyst Day on September 12. The company will use this forum to introduce new products. I also expect them to update FY2013 guidance and I'm expecting a bullish tone and bullish body language with a conservative in-line to slightly higher guidance. But a bullish tone should be the takeaway.
- Brocade could announce a new CEO. The company recently advised shareholders that current CEO, Mike Klayko would be stepping down as soon as a successful search by the Board of Directors is concluded.
- Takeover speculation could surface at any time. Brocade has returned to growth and continues to throw off massive positive cash flows. Recent rumors have Dell Inc. (DELL), Hewlett-Packard Company (HPQ), IBM Corp. (IBM) and Oracle Corp (ORCL) as potential acquirers. I believe the chance of a buyout is very real and that the shares could start to price in a takeover premium post conference.
We should see a Golden Cross form in the next 1-2 weeks - a very bullish indicator that technical trader's scan for in their search for stocks to buy. This should give longs protection around the 5.30 area. A break above $6 and resistance should also get the shares popping up on technical trading screens.
Backed by solid fundamentals Brocade has been priced for value. However, we could see growth and momentum investors move into the stock as the revenue line continues moving to the upside, we hear bullish tones coming from the company and we await the possible appointment of a high profile CEO. It would not surprise me to see analysts in the coming quarters start to give comparable valuations to BRCD as they currently give to high growth players like Acme Packet Inc. (APKT), Juniper Networks Inc. (JNPR), F5 Networks (FFIV), Riverbed Technology Inc. (RVBD) and Mellanox Technologies Ltd. (MLNX) which trade at 15% - 20% times earnings. In fact the time may be near when the investors of APKT, JNPR, FFIV, RVBD and MLNX move into low valued BRCD as growth is back.
This company has been too quiet in the month of August on an IR front. Maybe that's an area they need to work at, but the next 30-35 trading sessions should see them busy again. SAAS is all about Siemens AG. (SI) and Verizon Communications Inc. (VZ) selling its software. The question remains; how long of a sales cycle does Siemens and Verizon need before we start seeing easy beats to quarterly numbers? The sales teams from both companies have been trained and out on the road since February 2012. I think the market is expecting a strong October quarter with a 4 to 5 month sales cycle in play. That said here's why I'm long and continue to add on dips.
- inContact will be hosting its annual inContact User Conference (ICUC) on October 9th. Last year's conference saw inContact land many unique customers. You can see the IR news releases in October 2011 one month post ICUC 2011. This year we should expect to see even more announcements as the leverage of its key partners and its new sales head (70-90 days) come into play.
- I expect to see SAAS attend the Craig Hallum Alpha Select Conference on Sept 28th in New York City. If it does it will be its first investor meeting since earnings and the company could announce that it intends to raise its sales growth guidance from the 37% it announced last quarter.
- SAAS is an attractive takeover candidate. Last week IBM purchased cloud human resource company Kenexa Corp (KNXA) for $1.3 billion. IBM seems to be on a spending spree in their bid to compete with Oracle Corp and SAP AG. (SAP) as this year they have now made nine acquisitions totaling $3.5 billion. They closed out last year with the $440 million purchase of Demand Tech in December 2011. Oracle and SAP have been busy too, in December 2011, SAP paid $3.4 billion for cloud business management software company SuccessFactors and then in February 2012 Oracle responded by paying $1.9 billion Taleo Corp.
- One analyst recently went to neutral on his rating because he wanted to see the company navigate through the transition of replacing the Executive VP of worldwide sales. I believe that in Bill Richardson they have replaced the previous Executive VP with a much stronger, more experienced and proven executive. I think the analyst(s) will soon be jumping back on board as the company delivers on its sales and the transition will been seen as a positive.
Since SAAS's big breakout in early August it has been forming a flag pattern. We should expect to a resolution of this with a breakout to the upside in the next week. There is support at $5.50 and $5.40 and some strong overhead resistance at $6.00. However, with the trend in our favor, a close over $5.85 with volume of 250k - 350k will set it up for a test of $6.00. If we see a large volume day of 750k - 1.2 million then we could easily break through and close above $6 per share.
The company has proved that its technology is valid and its sales and marketing team has expanded its footprint globally with the right partners. The next 30-35 trading sessions could finally get SAAS in the scopes of Jive Software Inc. (JIVE), Splunk Inc. (SPLK) and Palo Alto Networks Inc. (PANW) holders. Again, SAAS could announce that the sales growth will exceed the 37% guidance management sees by 4th quarter 2012 and the ICUC will give SAAS holders its first look at Siemen's and Verizon's sponsorship. I see SAAS serving up a winner to traders watching a close above $5.85 with volume and a close above $6 with volume.
With BRCD and SAAS heading into conferences the stage is set for them to deliver. I would look for both shares to rally and crack $6.00 with big volume in the near term and then trade higher.