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Novell: Catching a Falling Knife?

It is really a simple philosophy: buy low, sell high. But when a stock is collapsing, the philosophy is usually: Buy high and then the stock continues to drop.

Currently, investors are particularly tough on companies. Even if a company exceeds expectations, investors may not be satisfied. But if a company misses, watch out. It won't be pretty.

Novell (NOVL) is in the unenviable position of experiencing this first-hand. Yesterday, the company announced that revenues in the upcoming quarter will fall significantly short of expectations. For example, the company admitted that it missed it sales forecasts by $10 million per week for the last five weeks of the quarter. In fact, there is a possibility the company will show a net loss. The result was a plunge in the stock price - as it fell $6.94 to $10.63.

Actually, such volatility is to be expected, especially from traditional tech companies that are re-engineering their products for the Web. However, there appears to be deeper problems with Novell.

First of all, the competition is intense. The release of Windows 2000 was a major setback. Despite the mighty antitrust case, Microsoft still is relentless with the competition. There is also competition from the many Linux companies that are peddling their solutions to corporate America.

Second, the company admitted that there were "management and organization issues in sales." There was also "poor quarter management." In other words, it sounds like there was chaos run amok. Part of this was the result of the departures of key employees in the sales department. To remedy the situation, Novell hired a new VP of sales and marketing, Nicholas Tiliacos, who was with Lucent Technologies. Unfortunately, rebuilding the morale will likely be a long-term process.

This is the second time Novell has disappointed. In the current financial environment, this is horrible for the prospects of the stock price. While a baseball player may have three strikes, high tech companies only get one strike. It looks like Novell might be on the bench for some time.