This post is part of a series featuring bargain stocks that are worth a look now. See more Cheap Stocks.
Tech stocks are taking a beating lately, as more and more companies scale back on their IT spending. While it may be foolhardy to bet on any significant short-term rallies for this struggling group, there's probably no better time than the present to dive into a long-term play. With BMC Software (NYSE: BMC) approaching key support levels, this is one stock worth looking into.
While many major technology concerns have provided weak or slashed forecasts for the coming quarters (Cisco, anyone?), BMC recently raised its fiscal 2008 earnings guidance. The company now expects fiscal-year profits of $2.15 to $2.25 per share, up from its previous outlook of $2.10 to $2.20 per share. BMC also exceeded second-quarter profit expectations in its October 30 report -- overall, this is one tech name that's no slouch in the earnings department.
With BMC holding up strong in a tough environment, it's no wonder that Raymond James analyst Michael Turits recently upgraded the shares from Outperform to Strong Buy. "We expect ... BMC to continue to benefit from the relative resilience of the mainframe market," Turits wrote in a note to clients, adding that "customers at the [CA World] conference indicated no slowing in mainframe capacity growth planning."
On the charts, investors haven't spared BMC. The stock is down 30% year-to-date, but its decline was recently caught by its rising 80-month moving average. In the event this trendline is breached, traders will want to keep an eye on the $20 level. This round-number region provided stiff resistance from 2002 through 2005, and could now switch roles to act as support. (In fact, the equity's current annual low stands at $20.58.)
If more analysts follow Raymond James' lead, the positive attention could draw more buyers to the stock. According to Thomson Financial, the average 12-month price target on BMC is a reasonable $32.42. For the sake of comparison, the equity's current annual high is $40.87. This configuration leaves plenty of room for potential price-target increases as BMC continues to exceed expectations.
Plus, the shares have rarely been cheaper in recent years. BMC's price/earnings ratio at the end of November was 18.91, a significant discount to its five-year average PE of 44.7.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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