Last year, investors learned that tacking ".com" onto a company's name could double its stock price.
Then "B-to-B," as in business-to-business Internet commerce, became the password for instant stock-market success.
The latest magic word seems to be "Linux," the open-source computer operating system that has been growing in popularity among some groups as an alternative to Microsoft's Windows.
All it has taken to double the price of the stock of Government Technology Services Inc. of Chantilly was announcement of an agreement with Red Hat Inc., one of the biggest makers of Linux software.
GTSI's stock, which had been stuck below $3 since mid-October, closed yesterday at $5.62 1/2 and has traded as high as $6.75 since the first reports of the Red Hat deal, which was finalized Tuesday.
GTSI sells computer equipment, software, supplies and services to federal, state and local governments and will add Red Hat's Linux line to its catalogue for federal clients.
The Red Hat-GTSI relationship is not monogamous. Other vendors will also be allowed to offer Red Hat's Linux line to federal agencies. But Red Hat's entry into the government market will be via GTSI, which markets 150,000 products made by 2,100 companies.
Selling off-the-shelf office products to Uncle Sam is a far more competitive business than turning out $200 toilet seats for the Pentagon or making software, which can produce gross profit margins in the 40 percent to 50 percent range.
GTSI, in contrast, reported gross margins of just 7.6 percent on sales of $468 million in the first nine months of last year. Bottom-line profit came to 1.4 percent of sales--about the same as well-run supermarket chains such as Giant Food Inc. Those thin margins are the chief reason why stocks of government contractors in general and computer resellers in particular have been shunned by investors.
Unless investors decide GTSI stock deserves to be valued based on some new paradigm that ignores the traditional relationship between the company's earnings and its share price, it's hard to envision GTSI selling enough Linux products to double its earnings and thus the price. Neither GTSI nor Red Hat will say anything about potential sales and profit.
But chairman and chief executive Dendy Young said the Red Hat deal has raised GTSI's profile at a time when the company is reinventing itself to become more profitable.
"When we became associated with the Red Hat name, people for the first time looked at us as they hadn't in the past," he said yesterday, after one of the company's big conferences with its suppliers.
What they're seeing, Young added, is a company that is remaking itself as a marketing machine with access to the people who actually make government purchasing decisions. At the same time GTSI is offering more systems integration services and support work instead of simply moving products.
Investors also are seeing a stock that is a bargain by traditional standards, Young said. Because stocks of government suppliers are so out of favor, GTSI shares are selling for roughly the value of the company's tangible assets.
Linux is a free software alternative to Microsoft's Windows for handling the internal operations of computers. Anyone can give away Linux, Young explained, but what Red Hat wants to do is sell the add-ons and accessories and--this is where GTSI comes in--the support necessary to efficiently make use of the operating system.
Linux software companies such as Red Hat also need marketing help to jump-start their sales and justify their soaring stock prices, he said. "They have a great name and a lot of pizazz and a serious need to meet the expectations of their investors."
Only time will tell whether the pop in GTSI stock produced by the Red Hat buzz will hold up over the long term, but the last local stock blessed by Linux surprised some skeptics by holding on to at least part of its gains.
Shares of V-One Corp., a Germantown maker of computer security software, rocketed from under $2 a share to $13.50 in late November after it announced a Linux product. The stock gave up much of that within a couple of days, but yesterday V-One closed at $7.50--which, other than the one big day in November, was the stock's highest level in nearly three years.
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