Late last year a Silicon Valley newspaper did a piece on the resurgence of Symantec (NSDQ: SYMC). At that time its stock had been on a tear; since bottoming out below $14 in the summer of 2012 the stock climbed up the charts, peaking above $26 only one year later.  Even by tech stock standards, an 85% increase in only twelve months is pretty heady stuff, especially for a company in a sector that is closely tied to the moribund PC market.

However, since last August the stock has pulled back below $21, with most of that decline occurring during a five-day span six weeks ago. What changed?  Symantec released its fiscal third quarter report on January 29^th, which included a 5% decline in year-over-year revenue. However, its GAAP operating margin increased by almost seven percentage points, resulting in a 13% gain in earnings per share.

The company also issued guidance for its fiscal fourth quarter, which included a continuing decrease in revenue combined with a continuing increase in its GAAP operating margin. In other words, while sales are going down, profitability is going up. Of course, a company can “shrink to grow” for only so long, and then needs to start moving the revenue needle back up to avoid financial disaster.

So that question becomes, is Symantec a long-term winner currently available at a cheap price, or is it a long-term loser that will eventually take its place among the cluttered heap of former tech stalwarts done in by the demise of the PC?  To answer that question, let’s take a look at where the company came from, and where it is heading.

Symantec is a maker of computer security software. It originally became world famous for its anti-virus products for PCs. Their products were sold with new PCs, which made up the bulk of their revenue. With the decline of the PC came significant declining fortunes for Symantec.

But the accelerating decline in PC sales is not the only culprit. A slew of competing products that offer basic protection at no cost cut into Symantec’s revenue stream. The industry has changed as well, and Symantec has been slow to react. Their CEO admitted as much when he volunteered that half of the threats they blocked last year were not based in their core security technology of digital fingerprints.

The stock rose 50% after Symantec installed a new CEO, Steve Bennett, in 2012. Bennett  cut jobs, restructured the sales organization and installed a new chief technology officer. Everything looked rosy until the most recent earnings report.  As a result, just last week the company once again shook up the executive suite by appointing a new chief accounting officer who in turn will report to a newly hired CFO.  Clearly, the board is saying enough is enough.

But shoring up its financial processes is only one of the issues at the end of the day, and not the most important one at that. Ultimately, improved financial performance will depend on the extent to which their future business strategy is focused on Cloud and Big Data, or legacy systems and networks?

When Lou Gerstner took over the ailing behemoth IBM, he was quoted as saying that innovation is what is not needed at Big Blue. What he meant was the innovation was there, but not a strategy that positioned them over the changing market opportunity.     

Symantec has a long history of innogration since it was founded back in the early 1980s. Therefore, Symantec understood what was needed to win. However, if the new CTO, Amit Mital, does not engineer a new market strategy, then Symantec will not become a category leader in the new marketplace.

In reviewing Symantec’s acquisition over the last 10-plus years, we note that all of the purchases were PC-focused with the possible exception of VeriSign; the rest were primarily focused on Microsoft’s portfolio of products. The market clearly has not been trending Microsoft’s way over the past decade. Actually, the reverse is true, which proved to be the reason for Steve Ballmer’s ouster as CEO.

During the past month Symantec’s stock price has dropped more than 10%, pushing it back to where it was in January of 2013. It now trades at less than 17 times TTM earnings, and pays a dividend yield of almost 3%.  That satisfies two of our BiQ criteria, but what we need to see from Symantec before adding it to our Investments Portfolio is a clear directional change into security solutions for the mainstream markets in Big Data and the Cloud.  

However, we are adding Symantec to our Equity Trades Portfolio based on its recent price weakness.  We may be a bit early, but we think the company now feels compelled to implement its new strategy as quickly as possible. They have moved into mobile security but they are clearly a follower here and not the leader.

What Symantec needs to do is innograte by developing a new suite of products to reposition itself over larger growth opportunities, or otherwise risk remaining in the doldrums. If it can successfully reposition its portfolio then we suspect that they will become a potential candidate for being bought out by one of the Cloud or Big Data tech company winners.    

Symantec (NSDQ: SYMC) is being added to the Equity Trades portfolio with a buy limit of $22 and a stop loss limit of $18.