SolarWinds Inc

I spent the first part of the year working in California, and have been buried under a mountain of work all year.

During this time I never walked away from the market fully, but I certainly did not have the time to look for new plays. The few moves that I did make, I stuck to my strategy of picking up preferred shares in stable companies. I also did not adjust any of my retirement accounts. Now its time to make some adjustments and look for new plays.

The market for preferred shares, and dividend stocks in general, has been really hot. This has limited the number of good opportunities that are out there. I did seize that run up to sell off Altria Group (MO), which is something I never thought I would do. At the end of the day I was up over 40% not counting several good years of dividends. I also unloaded Chevron (CVX) and re-bought, then unloaded again.

Over the past week I picked up two small-cap companies I think have a pretty good shot at substantial growth. The first is SolarWinds Inc (SWI), which is a software company. They call it IT Management and Performance monitoring software. This is a tough market space, and the competition is very strong. Smaller software companies have to work very hard to carve out niche markets. What I think these guys have working in their favor is that software and network monitoring, in a dashboard style, is really a hot area right now. They might be able to use that to their advantage to win some contracts.

The other possibility here is that these guys are able to innovate at a level that makes them a take over target. IBM, CISCO, and other big players in the IT market like to acquire these kinds of companies if they feel that the product can be used to improve their current offerings. Often times it can be cheaper for them to buy a software company than for their in-house folks to develop a competitive tool.

I fell like SolarWinds (SWI) has a reasonable shot at success over the next 12 - 18 months. A lot of their success will ride on corporate IT spending, which I have to admit I do not expect to see growing. There have been a lot of recent articles and studies citing stagnant IT spend. It is clear that internal IT has become a commodity, and that means you can buy it from anyone, and shop based on cost. This could be good for SolarWinds if they are able to undercut the competition on cost.

The company ranked fifth on Forbes "Americas Best Small Companies" list. Average return on equity of 67% over the past five years was tops among all companies on list.