VMWare: Pull-back is Buy opportunity

Posted Dec 9th 2009 2:50PM by Joseph Lazzaro
Filed under: Stocks to Buy

The conventional wisdom is that virtualization software company VMWare Inc. (VMW) should be sold after a decent gain 2009, due to a likely, tepid recovery in IT spending in 2010.

However, VMW's software designed to increase efficiency and optimize performance is tough to argue against in an economy in which cost-cutting will mean almost as much as top-line growth, hence I'm reiterating my buy rating for the company, first recommended on June 5, 2009 at a price of $32.59. If you bought VMW in June, you're up about 25%.

Further, the view from here still argues that VMW's revenue growth should accelerate as the U.S/global recoveries take hold in 2010. The First Call FY2009/FY2010 EPS estimates for VMW are 95 cents to $1.09.

Technically, VMWare's stock chart is strong -- an uptrend, but with above-average volatility. Don't Buy VMW if you can't tolerate a 15-20% stock decline in a month -- it could happen. Also, there will be some year-end profit-taking by short-term institutional investors, but view the pull-back as a Buy opportunity. VMWare is headed north.

Stock Analysis: VMWare Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in VMW now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your VMW position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $14.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: vmw