Given the market's attraction to glamorous products and eye-catching headlines, it is easy to forget that the large-cap technology sector includes more than Apple (AAPL). Even beyond the Dow Jones Industrial Average components Intel (INTC) and Cisco (CSCO), other technology firms contribute both to the marketplace and to the stock market.
A couple of enterprise software firms came up in my scans this week, so I decided to do some further analysis into what's moving that industry. Coincidentally, IBM (IBM) rose 0.75% Friday, to $207.45, on news that Big Blue would launch a data-management service for corporate clients.
Enterprise software used to be a fairly cut-and-dried category, when it had consisted of companies making various database management tools for business users.
These days, however, the subsector can be sliced and diced in a number of ways. The granddaddies of the large-cap enterprise category, Oracle (ORCL) and SAP (SAP), share the space with firms like Salesforce.com (CRM) and VMware (VMW).
VMware is a good example of a stock that's currently consolidating, with a potentially constructive moving-average crossover ready to occur. This company, which specializes in virtualization, has a number of the attributes that I've been including in scans for years: Solid earnings estimates; a good history of earnings and revenue growth; strong return on equity; and robust cash flow per share. Liquidity is not bad -- about 1.9 million shares change hands per day, on average.
In addition, VMware had its initial public offering fairly recently, having been spun off from EMC (EMC) in 2007. Stocks that have made their public-market debuts in the past decade or so are often among the best price performers. As of Friday, VMware was trading slightly below short-term moving averages, but was perched above the 200-day and 50-day lines.
In recent sessions, VMware's technical performance has been essentially on a par with that of industry peer Citrix Systems (CTXS). On a monthly basis, however, VMware is the stronger performer, having shown a September gain of about 8.6%, to $96.74, as of Friday afternoon. Citrix, meanwhile, was down about 1.5% to $76.53.
Other large-cap specialty enterprise names have also been floundering recently. CA (CA), another of the old-line, mature companies in the space, lost 1% in September to $25.76.
On a fundamental basis, CA would be the last choice among the three. Citrix and VMware are both expected to grow earnings at double-digit rates in the next two years. Analysts expect CA to increase earnings in the high single digits.
Revenue performance at CA has also been on the weak side, with a year-over-year decline of 2% in the most recent quarter, to $1.14 billion. Growth had been decelerating prior to that, as had earnings growth.
It's usually not a good idea to load up on several individual stocks from any one subsector. If there is bad industry news, all of your stocks could be slammed at once. If the choice is between several stocks in similar or related businesses, go for the one with the best overall combination of fundamental and technical traits.