"Timing is master of the market."

-- Christina Nikolov

Name/Ticker: Legato Systems (LGTO)

Date: January 2, 2003

Opinion: Bearish

Current Price: $5.33

Target Price(s): $3.69, then possibly below $2.00

Commentary:

Over the past three months, Wall Street's prognosticators slashed their 2003 earnings estimates for Legato Systems (LGTO) by 45.8%. Regardless, the shares are now 92.4% higher than they were three months ago and tout a p/e multiple of 246 based on fiscal 2003 projections.

LGTO stormed ahead by 286% between the August 14th low and the November 22nd peak, then promptly forfeited half the gain. While the decline wasn't steep enough to reach any significant support levels, it did come close to the upward sloping 50-day moving average. On a bullish note, the 50-day moving average is in the process of crossing above the 200-day figure. (chart #1)

Now that this stock is rapidly approaching an overbought condition on a daily basis and nowhere near being oversold on the weekly chart, we expect any upside to be limited to the November 22nd high of $6.50. Of course, there's a very good chance a reversal will occur before the stock appreciates to that extent.

Anyone who feels LGTO is cheap because it's trading 93% below its September 2000 peak of $821/2, is grossly mistaken. This stock touts a p/e multiple significantly higher than EMC Corp's 173 times 2003 earnings. And don't forget what happened to EMC over the past year.

To profit from this anticipated decline, we suggest one of the following alternatives: 1) Short the actual stock into strength. 2) As the underlying security approaches or even surmounts $6, purchase the June 10 put (Symbol: EQNRB), which is currently offered at $5.10.



Chart(s):

#1) Legato Systems (LGTO) Seven Month Daily Chart

Click the Chart for an Enlarged View