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HolidayBuyer's Guide
Tech Industry

2HRS2GO: Check Point checks out fine

Once a stock has raced as far as Check Point Software (Nasdaq: CHKP) over the last several months, the market often looks for any excuse to pause and gather itself. Prudential Securities provided one today.

Shares of Check Point had fallen almost 7 percent by this afternoon after Prudential analyst Paul Merenbloom leapt past an entire layer of sentiment to downgrade the stock to "hold" from a "strong buy" rating. His reason is simple enough: the stock price is too high.



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Check Point climbed yesterday as the vendor of network security software held one of its twice-a-year analyst meetings; shares closed Thursday's regular trading at 138, a 5.5 percent gain for the session. Prudential has a Check Point price target of $130 per share -- based on a 20 percent premium to the expected growth rate of 35 percent -- so from Merenbloom's viewpoint, the stock is overvalued.

His voice remains in the minority among analysts. Of 16 Wall Street firms polled by Zack's Investment Research, 14 recommend Check Point as a "buy" of some kind. Goldman Sachs, FAC/Equities and Soundview Technology Group each reiterated upbeat ratings today.

Merenbloom's only companion is Sands Bros. analyst Kama Krishna. He's had a "neutral" rating on Check Point since mid-September.

"The company has done everything it can for the stock price, but it's the market that determines these things," says Krishna. "Check Point has been a momentum play for awhile now. ... Most stocks have gone beyond their valuation, so I think Prudential is just being prudent."

Stockholders probably used Merenbloom's concerns as an excuse for profit-taking, which isn't a bad idea considering the stock had risen roughly sixfold from its 52-week low. But most folks are just riding it out today's drop -- after four hours of trading, volume on Check Point was moderate at less than 700,000 shares.

That majority is smart to stay with Check Point, because the company stands as stalwart as it did seven months ago when the stock was way (waaay) undervalued. Even Krishna and Merenbloom remain confident in the strength of Check Point's business.

"We consider CHKPF the premier leader in the security and VPN (virtual private network) space, and would look for any pull back in share price as an opportunity to re-evaluate our rating," Merenbloom writes. "We continue to believe that CHKP remains one of the most effective technology players in the market today."

It's a rare thing to see nowadays on Wall Street: a "hold" rating that actually means "hold onto it," as opposed to "sell that thing now." And ratings are what matter ultimately, not actual price targets, which are always malleable and rarely accurate with any analyst.

(Some people even lack faith in ratings, but that's just nitpicking. Anyone can pull out bad examples, but the overall recommendations are better guideposts than you might think, particularly on a consensus basis)

Rating or not, should the stock price drop below $100, Check Point would "definitely" be worth buying, Krishna says. At that price, Check Point would be trading at 34 times the First Call consensus estimate for 2000. Not exactly cheap compared to the overall market -- but a bargain compared to leading stocks in other software niches.

And if doesn't drop, it'll rise, because staying level isn't likely for Check Point shares at this stage. The company has the growth pattern of a hot networking issue -- it goes up or down, but doesn't tread water.

Not a bad choice to have: a buying dip or capital appreciation. Either way, you might be better off waiting this one out unless you truly need the cash now. In the meantime, go for a stroll or plant some flowers. Check Point could be blooming again when you get back.

Other issues:

  • Systems & Computer Technology
  • (Nasdaq: SCTC) The enterprise software vendor's stock rose yesterday after Jefferies & Co began coverage with a "buy" rating, but the investment firm still sees room for growth.

    The company's stake in an outfit called Campus Pipeline -- sort of a portal for college students and faculty -- could be worth $5 to $10 per SCTC share if the venture goes public, says Jefferies analysts Richard Williams and Patrick McElroy. Systems & Computer Tech's core markets -- manufacturing and utilities -- offer plenty of room for growth. And Y2K cloud are starting to disappear from the enterprise software market's horizon. 22GO>