Cashing in on Cloud Computing

02/02/2010 10:24 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, says a venerable technology company is finding new life in the new wave of cloud computing.

The trend I’ve been talking about for months—a flight toward the safety of income—may finally be kicking in. Nonetheless, I do not think the “risk trade” is over. The fall in the market lately requires watching, since it could escalate into a resumption of the bear market, but so far it is nothing more than a needed pullback after a very big run over the last few weeks. We have to have these shakeouts every once in a while.

Of course, as in 2006, when I was long-term correct about the nature of the economy and the direction of the market but was forced to capitulate to the short-term trend, I still dislike the overall look of things. I’m just more willing to take what I believe the market will give over the next couple of quarters. If it goes against us, I’ll reverse course quickly.

Novell (Nasdaq: NOVL) is making large inroads in “cloud computing,” the fashionable new way for information technology departments to spend their money. Basically, it is having most of your computer hardware off premises, where you only rent it from companies, sharing the hardware with others like yourself. The idea is that you only pay for the computing you use instead of buying hardware you don’t fully utilize because it’s idle sometimes.

To me, the idea of sending my data over the Internet to have other people store and process for me is utterly ludicrous, if not insanely careless, but it is, in fact, all the rage among companies now, and who am I to argue? Novell provides software for this.

The company is also a growing seller of Linux software. That market is expected to grow by double digits for the foreseeable future.

The company’s market capitalization is $1.6 billion, with nearly $1 billion in net cash on its balance sheet. You’re getting the company for a price to revenue ratio of about 0.6x—virtually unheard of in the software sector. Novell’s P/E ratio on expected 2010 earnings is a very modest 13x. My kind of stock.

The tech sector, while not exactly screaming out of the gate, showed it wants to continue its winning ways. While I’m less than enthusiastic about the sector as a whole, Novell is cheap and could get a nice boost if Fred Hickey recommends it in Barron’s Roundtable (subscription required).

In short, it’s a low-risk long-term opportunity with a possible near-term boost.

Buy Novell up to $5.25. (It closed above $4.50 Monday on heavier than usual volume after Hickey did indeed recommend it—Editor.)

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