Channel Stocks Can’t Shake Winter Chill

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Spring may be here, but channel stocks remain in a deep freeze.

For the week ended March 19, our Ziff Davis Channel Zone Stock Index fell 1.46 percent to 1114.27. Our index dropped more sharply than the Dow (-0.5 percent) and the S&P 500 (0.9 percent) but held up better than the Nasdaq (-2.2 percent) during the five-day trading period. Analysts blamed the declines on continued terrorism fears, rising fuel prices and an uncertain job market.

Our 30-member index had three major losers on the week: Sapient Corp. (SAPE, -16.15 percent), DiamondCluster International Inc. (DTPI, -10.47 percent) and PC Connection Inc. (PCCC, -9.48 percent). This is the second consecutive week that the PC Connection has ranked among our biggest decliners, though the company (like Sapient and DiamondCluster) hasn’t announced any major news lately.

With the recent declines in mind, some financial analysts openly wonder if consulting shares are now undervalued. Thomas Weisel Partners, for one, upgraded Sapient shares from “peer perform” (i.e., neutral) to “outperform” (i.e., buy) on March 18, setting a target price of $7.50. Sapient shares closed at $5.45 on March 19.

Major Winner of the Week

Major Winner of the WeekOur index’s only major winner last week was Accenture Ltd. (ACN, +5.71 percent). Research firm Bernstein upgraded Accenture shares on March 15. The consulting firm is slated to announce quarterly results on April 13.

In addition to watching our index members, solutions providers should pay particularly close attention to their network hardware partners, where second-tier players like 3Com Corp. and Enterasys Networks Inc. continue to lose ground to Cisco Systems Inc. Indeed, 3Com disappointed investors on March 18 with an $86 million loss for its 3Q ended Feb. 27. Less than 24 hours later, Enterasys slashed its 1Q revenue outlook, predicting sales of about $87.5 million—about 12 percent below Wall Street’s original expectations.

One week before its earnings warning, Enterasys shook up its channel organization, naming Inkra Networks veteran Michael Rivers as executive vice president of worldwide sales and service. Rivers replaces channel veteran Cosmo Santullo, who is leaving Enterasys to pursue other opportunities.

In stark contrast to 3Com and Enterasys, Cisco’s business remains strong and CEO John Chambers has indicated that the company may eventually pay a dividend. Chambers’ revelation came during the Merrill Lynch Global Communications Conference in New York last week.

Next week, we’ll take a look at our index’s best—and weakest—performers for the first quarter of 2004.

Performance Chart for Week of March 15

Weekly Performance Chart

About this Column:The Ziff Davis Channel Zone Stock Index tracks 30 channel-related stocks on a weekly basis. We don’t recommend buys, sells or holds. Rather, the index seeks to measure the channel’s financial health. We launched the index on Oct. 24, 2003 with a value of 1000. Each stock in the index is equally weighted. For example, if one stock rises 5 percent and another falls 4 percent, the net result is a 1 percent gain.

Joseph C. Panettieri has covered Silicon Valley since 1992. He is editorial director of the New York Institute of Technology . Write to him at joe_pan5@yahoo.com.