Among the biggest losers in Friday’s early trading are Dril-Quip (NYSE: DRC), BlueCoat Systems(Nasdaq: BCSI) and Riverbed Technology (Nasdaq: RVBD).

Top Kill appears to Working, But Sector Stocks Sag

BP’s (NYSE: BP) efforts to finally stanch the flow of oil and gas in the Gulf appears to be working. Though it remains to be seen during the next few days if the fix is permanent, this is the first bit of tangible good news in quite some time. But that’s of no help to the many oil and gas drilling services companies. Dril-Quip (NYSE: DRQ), Stone Energy (NYSE: SGY), Oceaneering International (NYSE: OII), Baker Hughes (NYSE: BHI) and Halliburton (NYSE: HAL) and many others are all off more than -5% this morning.

The weakness comes from an Obama administration decision to freeze any new offshore drilling activity for the remainder of the year. As the Gulf Coast represents one our last great sources of domestic energy production, the ban will likely be lifted by late this year, albeit with greater restrictions.

Investors may be over-reacting to the new get-tough stance of the Obama administration. More than likely, companies will need to simply spend a bit more on ensuring that all drilling efforts comply with standard safety procedures. BP cut corners in its drilling process, and would not have needed to spend much more to do things the right way.

Action to Take –> If the flow of oil and gas is truly stopped — and that’s still a big if — then a lot of these stocks represent a real bargain in the context of an eventual rebound in Gulf energy exploration. This looks like a good time to move into some of these names while other investors are moving out.

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Blue Coat’s Mixed Message

Investors should take pause from the cautious guidance issued by Blue Coat Systems (Nasdaq: BCSI), a provider of network security hardware and software. Many firms have been talking about a steadily building rebound in tech spending, as we saw in robust first quarter results and bullish forward guidance. But Blue Coat, which had a respectable fiscal fourth-quarter (ended April) in which sales rose +17% from a year ago, sees sales falling sequentially in its fiscal first quarter. That’s pushing shares down more than -20% in Friday trading.

#-ad_banner-#Why the cautious tone from management? This comment from Thursday night’s conference call helps clarify things: “We are being cautious given developments in EMEA (Europe, Middle East, Africa) and their potential impact on our region is, which historically, provide 35% to 40% of the company’s revenue. We did see an impact on our business in April, and we currently have no evidence that conditions will improve in the near term.” You get the feeling that this may start to be a theme. We touched on this issue recently in this article.

A potential slowdown in Europe is unfortunate for Blue Coat Systems, as the company is just starting to reap the benefits from a recent large restructuring and is also seeing solid demand in the United States. The real question – which nobody can answer just yet – is whether the slowdown in Europe that Blue Coat saw in April will prove to be short-lived. It is possible that business activity froze at the nadir of the Greek crisis, but has subsequently returned to normal. It is curious that management spoke of European sales in April, but did not discuss May sales trends. We’ll have to wait for other firms to discuss European operations.

Action to Take –> If the European slowdown turns out to be a one-quarter event, then shares of Blue Coat are a real bargain after today’s sell-off, trading for around 10 times projected fiscal (April ) 2012 profits. That’s half the multiple of many other similarly-sized tech stocks with similar growth profiles. For longer-term investors, you can feel free to buy into this dip, but know that shares could fall another -10% or -20% before rebounding if the European crisis continues throughout the year. For short-term traders, the Euro skepticism should give you pause.

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Riverbed May Also Be Exposed

Shares of Riverbed Technology (Nasdaq: RVBD) may also be feeling a Euro-induced malaise, as its shares are off -6% in Friday trading on no apparent news. Riverbed, which makes appliances that optimize network traffic, derives roughly 30% of its sales in Europe. It’s worth noting that shares trade only 15% below the 52-week high and trade at 23 times projected 2011 profits.

What kind of price-to-earnings ratio (P/E) you give to tech stocks right now is the matter of much debate on investing blogs. On the one hand, we may be entering a solid growth phase after the recent economic slowdown. But some note that we shouldn’t expect a very sharp upturn because most companies’ IT infrastructure is in reasonably good shape. Moreover, many well-established U.S.-based tech firms now derive a large portion of sales in Europe as well, and IT spending there is likely to remain muted.

Action to Take –> For tech stocks like Riverbed, that 23 times forward multiple is about all you can ask for right now. To argue for a higher multiple would be premature in light of the tepid nature of the U.S. economic recovery along with the clouds hanging over Europe.