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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Oracle

December 23rd 2011 Oracle
Nasdaq Symbol: ORCL
Industry: Software
Price as of 12/23: $26.06


'Tis the season for tax loss selling or tax harvesting which is the politically correct term. The major averages are unchanged or modestly higher for the year, but plenty of sectors are down dramatically since the summer. With the use of ETFs, investors can now sell individual stocks for a loss and immediately buy a similar ETF. So for example, investors can sell any financial stock and immediately buy any one of the financial ETFs and avoid the wash sale restriction thereby allowing investors to participate in any upside in the near term. Heading into year end the sectors that have performed well continue to perform well. The utilities, healthcare, and consumer staples are performing great with a number of them hitting new highs. Eight of the 30 Dow components hit 52 week highs this past week. The technology sector had performed well up until the last several weeks when a number of them started preannouncing or reporting disappointing earnings like Research in Motion, Salesforce.com, Intel, Texas Instruments, Corning, and AMD. This week we'll feature another tech stock that missed earnings estimates for the first time in three years. The stock of the week is Oracle. The cloud computing space has been and will remain the hot sector within tech, but a short term hiccup in sales looks to be providing a buying opportunity. The recent sell off in Oracle's stock is providing an attractive long term entry point to investors looking for a blue chip stock in the cloud computing space.

On Tuesday night, the number 3 software maker earned $2.2 billion or 43 cents per share for the second quarter. That was a 17 percent increase in net income from $1.9 billion, or 37 cents per share at the same time last year, but missed estimates once you exclude one time items. Revenue for the period edged up 2% from last year to $8.8 billion. Analysts, on average, had projected revenue of $9.2 billion. The company is blaming the weakness on the lengthening sales cycles and additional deal scrutiny by customers, plus a currency headwind that developed in the quarter. The macro debate will now focus on whether IT spending is finally coming under pressure due to broader economic concerns. However not all the news was disappointing. The quarterly software license revenue grew 9% verse guidance in the range from 6% to 16%. Non-GAAP operating margins increased 45% in the quarter and will continue to grow. The company is expanding their worldwide sales capacity by adding over 1,700 sales professionals in the first half of this fiscal year and expects organic growth in the second half of the year thanks to new innovative products like Fusion Cloud ERP and Cloud CRM. Sales of their engineered systems accelerated in the quarter and finally, Oracle announced the Board of Directors authorized the repurchase of up to an additional $5.0 billion of common stock under its existing share repurchase program. Good timing since the stock recently made a new 52 week low.

Oracle's stock hit a 52 week high of $36 in May, but as mentioned has recently made a new 52 week low of $25 a share. With the recent pullback, Oracle's valuation is much more compelling. Currently, the stock trades for 11 times 2012 earnings which has a year end of May. The stock trades for just 10 times next year's earnings. The average stock in the cloud computing space trades for a whopping 56 times earnings. The stock also trades for 3.2 times sales and 3 times book value which is actually low for a software firm. The stock also has a modest dividend of just one percent, but the company has plenty of cash if they choose to hike that dividend. Like most software companies, Oracle is a cash cow. The company has $31 billion in cash or $16 billion net of debt and continues to generate nearly a billion dollars in cash every month. Even though Oracle reported a disappointing quarter, the company remains bullish long term. With the stock trading at a 5 year low valuation, Oracle looks like a good buy in the cloud computing software space for long term investors.