The On-Demand Index (ODI) was down 3.65% on Thursday, October 23, 2008, down 52.75% year-to-date (YTD) and the stocks within the index are down an average of 63.5% from their 52 week highs. The
iShares S&P GSTI Software Index Fund (IGV) was down 0.79% yesterday, -36.86%, YTD and -39.5% from its 52 week high. The YTD performance of the major indices (as of 10/28 US markets close): Dow -34.48%, S&P 500 -38.15% and Nasdaq Composite -39.53%.
The question an investor has: have we hit bottom in these stocks and is it time to buy? You would think with the kind of these stocks have experienced that they are not likely to go further down but consider:
The drop from the Internet Bubble (remember the Nasdaq breaking 5000?) was deeper and longer. We had multiple relief rallies or (I hate this phrase) "dead baby bounces" with each one spurring people to "buy on the dips." And the Nasdaq even at its peak in the Bull market we just experienced only regained about half of its all time high during that last bubble.
The on-demand software companies are momentum stocks that go up higher and down lower than "normal" business fundamentals or financial analysis would justify. We are in a bear market with these stocks going along for the ride.
The P/E ratios that are often overlooked on the way up become important during a bear market and recessions. Seven of the 17 companies on this index are losing money so they have no "P" for a P/E. Six of the profitable companies have P/Es over 50 with three of these sporting triple digit P/Es. These ratios do not scream low valuation or a value play.
With the recession and credit crunch those companies that require debt financing or VC (venture capital) investments are going to be encountering difficulty. VCs are already been advising the firms that they have invested in that they need to tighten their belts. This potentially means less marketing, sales and development activities. None of this bodes well for an emerging market or a startup.
Time to go for it?
For the brave and savvy there are stocks in this index that will produce positive gains. These gains can result from: relief rallies (but sell into these rallies); if the company is acquired; if the company can increase sales and profits despite the economic climate (and the market rewards them for it); and, if the market and economy turns.
When evaluating whether to invest in any of these stocks check out if they are making a profit, hat their cash flow and debt situation is, their competitive environment and how healthy is the markets or industries that they are selling to. And of course the larger macro issues of the US economy (most of these firms are still heavily dependent on US sales) and the stock market.
Disclosure: I have no current stock positions in any of the companies listed in this index and no current business partnerships.
fyi: The icons on the left column of the Data Doghouse blog are linked to the Google Docs that have both the On-Demand and Business Intelligence/Data Warehouse Indexes.