Rules of the Game: Head in the Clouds

It's fairly predictable that a bad company report will unleash a flood of punditry predicting doom for the company's entire sector.

In the case of tech, the doom-and-gloom predictions are a bit muddled: Companies such as Amazon (AMZN) get lumped in with tech, even though they may be retailers or content providers using the Internet and mobile apps as channels. Tech is traditionally a growth sector, although the sector can also decline more than the major indices in a broad market pullback. That's a characteristic of growth stocks, in general.

What got me thinking about all this was VMWare's (VMW) 21.5% gap-down on Tuesday, following its fourth-quarter revenue miss. While slowing demand initially spooked traders and investors, the stock was getting support above Tuesday's session low of $76.33. It closed Wednesday at $77.65. That was an indicator that some professional investors were spotting a buying opportunity, and scooping up the shares because they perceived a bargain.

VMWare is the largest company on my screen of top-performing techs ("tech" being defined by S&P 500 sectors) that went public in the past few years. Facebook (FB) has been in rally mode, but doesn't make my screen because of its tepid earnings performance in recent quarters. That screen had not yet factored in Wednesday's better-than-expected fourth-quarter results.

Also on my scan is Workday (WDAY), which makes cloud-based human resources and payroll apps. The stock went public at $28 in October. It skidded 4.8% Wednesday, to $53.24, getting support just above its 15-day moving average. The stock gapped down at the open Wednesday, following Northland Securities' initiation of coverage with a Market Perform rating.

A glance at the chart shows you instantly: Workday's advance has not exactly occurred in an orderly fashion. The stock shows wide intraday and intraweek price swings, so it may require some extra patience for individuals to hold.

I typically like to focus on large-cap names that could serve as longer-term positions within a portfolio, but Workday may be worth a look as a watch list candidate. First, the stock's market cap as of Wednesday's close was $8.84 billion. It could be on the verge of moving into big-cap land (assuming it does not go into a near-term price plunge).

Second, recent IPOs are often among the market's best performers, when viewed over 12-month time frames. New companies tend to have enthusiastic management with creative ideas, and sales of products and services are still undergoing their youthful growth spurts.

A fellow mid-cap, cloud-based, enterprise software maker is NetSuite (N). The company sells customer relationship management and e-commerce products. It went public in December 2007 at $26.

The company is due to report fourth-quarter results after Thursday's close. Analysts have pegged earnings at $0.04 per share on revenue of $83.04 million. That would mark a year-over-year decline on the bottom line, but a significant gain on the top line.

NetSuite closed Wednesday at $68.95. Its upward trend has been intact since the stock emerged from the summer of 2011 market meltdown. NetSuite's pullbacks since then have consistently found support at or above the stock's 200-day line.

With a market cap of $4.9 billion, this stock is too small to play a major role in a portfolio, but it could be viewed as a candidate to add some growth to a more moderate overall strategy. It is currently somewhat extended from its 50-day and 200-day lines, so the next retreat with moving-average support may offer an entry opportunity.

At the time of publication some of Stalter's client portfolios held some shares of VMW.