Solarwinds Inc (SWI) added to our universe of potential longs should the rally resume

There are a number of reasons for us to shy away from this stock.

It is extremely thin with a 50 day trading average of only of $9MM a day. We normally look for at least $30MM before we get involved.

The float is only 5MM shares in a universe of 65MM shares. This small float is likely to make for volatile trading. And the large number of shares locked up is likely to only increase the size of a secondary offering on a significant rally after the lockup expiration on November 20th.

But SWI is a new issue that is not yet a well known story. Over time these technical objections can be overcome with increased interest in the company if it proves itself as a growth vehicle.

Another objection we have is that the company is very small and singly focused in a sea of larger and more diverse competitors. Thus far it has made its name by selling a less expensive and more nimble platform than its competitors, but it’s not as if SWI has a sustainable competitive advantage.

Of course the flip side of this is the company could well be a takeover candidate. We saw what can happen when big fish in an industry compete over a desirable niche player recently when EMC (EMC) and Netapp (NTAP) drove up the price of Data Domain (formerly DDUP) in an effort to keep it out of each other’s grasps.

But all of this begs the point. SWI garnered our attention Tuesday because of the way it acted in a horrible market. It traded lower early but bounced off its 50 day MA on very high relative volume, ending nearly unclosed on the day.

A look at the weekly shows constructive trading. While the weekly ranges are bit wider than we’d like to see, likely a reflection of the small float, note how the closes the last four weeks are tight. That indicates demand and support for the stock.

SWI beat and raised at their first report as a public company. They have year over year projections for 36% and 77% EPS increases on 12% and 32% sales increases, respectively.

SWI is not a buy during a market correction. But we’ll be watching to see if it continues to trade constructively as the correction continues. For now it’s in our universe of possible future investments.