3 Mid-Cap Losers From Wednesday and What to Expect Now

Fortinet Inc, a provider of network security appliances and unified threat management (UTM) network security solutions to enterprises, service providers, and government entities worldwide, fell over 5.50% in trade on possible profit booking by investors. The stock has gained close to 30% YTD on secular growth trend in the UTM market and the company’s strong competitive position.

The activity levels in Asia Pacific remain strong

The activity levels in Asia Pacific remain strong and growing security initiatives are expected to translate into higher spending in the region. Japan accounts for ~6% of the company’s earnings and recent events are not expected to cut the spending because of the strategic nature of the security. The company has been reporting positive cash flows since 2006 and is trading at 22x FY11e consensus cash flow, compared to a median of ~28x for the infrastructure and SaaS comp group.

BroadSoft Inc, a provider of residential and business voice over Internet protocol application software, fell over 5% in trade on likely profit booking. The stock has soared over 350% since last November. The stock looks expensive with a P/E over 44x forward revenues, nevertheless when we look at an EPS growth of 70-80% the PEG is for all that below 1x.

The company has shown a significant improvement in margins in FY10 and however has a lot of scope for improvement given management's commitment to achieve 24-26% margins. Fundamentally, the company is likely to see a multi year secular growth from an overhaul of legacy TDM voice networks. We expect the stock to consolidate at these levels and one may use this as an possibility to buy into the stock.