Pegasystems, Inc. (NASDAQ:PEGA)

CAPS Rating: 4 out of 5

The Company develops, markets, licenses and supports software to automate complex, changing business processes.

Recs

7
Player Avatar JakilaTheHun (99.93) Submitted: 5/8/2009 5:57:49 AM : Underperform Start Price: $11.14 PEGA Score: -32.64

Have you ever made a stupid CAPS pick and regretted it the next day? It actually doesn't happen to me very often, but looks like I might have become a little overconfident from recent success. This is a stupid pick. But since I can't turn back time, I'll give you the reasoning as to why I red thumbed it:

PEGA has had a huge run-up recently;it's gone from $14 to $23 in only two months. Book value is around $5, so that gives it a rather high P/B ratio. Earnings have been historically low and do not appear to be increasingly all that rapidly (at first glance --- this is where I screwed up). Cash flows are not overly impressive compared to the price of the stock. I did my quick DCF valuation based on some assumptions and came up with a price of $19. Given the run-up, I said, why not? Let's go with underperform.

Now I'll tell you why I was wrong. I normally take a look at companies' revenues and cost structure. I've occasionally had some picks that revolve around the idea that investors were blindly looking at earnings and cash flow figures at face value without actually dissecting why the results were reached. Revenues for PEGA are growing quite rapidly. From 2007 to 2008, revenues grew $50 million, while profit grew $30 million. It doesn't look impressive in per share items, but if every incremental dollar of revenue is producing that much extra on the bottom line, that's pretty big! And this company is growing quickly!

I also neglected to really read their 10-K before red thumbing. I'm actually impressed with what this company does. They probably have sizable growth in store. I don't think $35 would be a completely unreasonable valuation. Also, FCFs are significantly higher than earnings as this company must've had incurred high up-front costs. I'm aware of companies in similiar industries (e.g. VOCS) that work similiarly and one can often misprice them by ignoring the extent of the difference. At least for my part, I did factor examine the FCFs fand use them for my valuation (quick DCF). I simply didn't factor in enough growth.

Not sure what I was thinking yesterday. I was actually thinking about how I've gotten to the point where I can predict outperform vs. underperform for many companies with a 70%+ success ratio based on 15 minutes of research. I was getting overconfident. I have a lot of faith in my quick stock analysis skills, but I should have spent an additional 15-30 minutes further analyzing this puppy before hitting the red thumb. Sheesh, what was I thinking?

This thing might be due for a bit of a technical retreat one way or another, so maybe I can get out alive.

Member Avatar JakilaTheHun (99.93) Submitted: 7/14/2009 3:03:58 PM
Recs: 0

Come on PEGA --- just a little bit downward and I can escape one of my dumbest picks.

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