2HRS2GO: Secondary cancellations bring market smiles

Spare us your liquidity and we'll spare you.

Or so the market has declared. Market gangs continued the recent trend of drive-by shootings on tech stocks, but Network Access Solutions (Nasdaq: NASC) stayed healthy today by keeping its head below the window. The seller of DSL network equipment and services saw its stock rise more than 40 percent this morning, after yesterday's decision to withdraw a planned secondary offering.

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Traders and investors made it clear to tech and Internet companies in recent weeks: we don't want any more of your stock. Heck, the market doesn't even want the stock it already has. SciQuest (Nasdaq: SQST) and Modem Media.Poppe Tyson (Nasdaq: MMPT) were among those canceling plans to return to the public feeding trough.

Network Access registered its secondary offering with the U.S. Securities Exchange Commission on Dec. 22. At the time, Network Access floated the possibility of raising up to $160 million through the sale of 5.75 million shares. The stock traded at 36 1/8 on Dec. 23. NASC has never regained that level and currently trades almost 60 percent below that peak, even with today's gains.

The company had an inkling that the market might not be so receptive, when it amended the registration statement to cover a slightly smaller offering of 5 million shares. Network Access was at least smart enough to limit insider sales to a relatively small 199,823 securities.

Still, Network Access remained sufficiently optimistic to assume an average sale price of $30 per share, enough to raise $134.8 million, once commissions, fees and other expenses are deducted.

Cash doesn't appear critical at the moment. Network Access had $191.6 million cash, largely raised through a Mar. 7 sale of 1.5 million preferred shares, according to the latest S-1 filing. Operations consumed $20.2 million cash last year, so even using the extremely unrealistic assumption of no revenue growth at all, Network Access seems to have enough money to last for quite awhile.

Perhaps that's why investors were eager to boost Network Access today, despite the fact that it's the same company it was yesterday. They were so eager that, in typical market fashion, they overstepped the bounds of rational exuberance yet again.

Network Access shares were up 43 percent at one point in today's session. They've since settled into the range of 18 to 20 percent gains, but either way, it's an outsize reaction considering the secondary would have provided for about 10 percent dilution.

Some folks have suggested the NASC slump might have enticed investors also. The stock closed yesterday at 13, or just a dollar above the IPO price. I have my doubts about that, because the market has ignored other slumping stocks with far better fundamentals than a 5-year-old company that reported less than $4.8 million revenue and worsening gross margins in the December quarter.

But as I've said before, this still isn't a market driven by fundamentals. Stock decisions carry more weight than operating results, and it doesn't look like that'll change anytime soon.

Other issues:

Gateway

(NYSE: GTW) On the other hand, stockholders of this PC maker provide hope for sanity. Shares of Gateway swam against the prevailing market and gained ground for much of today even though the company, by its own admission, failed to meet first quarter goals for sales to businesses.

But the market knew enough about Gateway's long-term plans to overlook the revenue blip. Investors recognized that in all of its target segments -- consumer, education, government, and small-to-medium-size businesses -- Gateway did extremely well. This is a company that isn't relying heavily on Fortune 500 firms for growth.

And its larger Beyond the Box initiative continues to pay off. Prices for PC hardware remained basically flat, yet revenue per PC rose 2.8 percent in the first quarter. Recurring revenue -- the gift that keeps on giving -- increased to 14 percent of income, compared to 10 percent in the fourth quarter.

Honesty also helps. Executives didn't shy away from talking about their enterprise revenue letdown. They set more realistic second quarter expectations, which pleased Merrill Lynch analyst Steve Fortuna. How often do you see a stock get upgraded after lowering revenue expectations?

That outlook probably offered the biggest lollipop of all, because despite the revenue disappointment in the first quarter, Gateway still sees a decent second quarter and strong second half. The company sees no reason for analysts to deviate from current estimates of $1.83 EPS for the year.

In other words, if you liked Gateway last week, you have no reason to dislike it today. The roadmap hasn't changed. 22GO>