Shares of Gigamon (GIMO) are shedding some of yesterday's gains after DA Davidson analyst Mark Kelleher downgraded the stock to Neutral on valuation. Commenting on the announcement of Elliott Associates' stake in the company, the analyst said he believes a sale will be high on the list of "strategic alternatives," an opinion shared by his peer at Credit Suisse, who upped his target this morning for Gigamon.

ACTIVIST INVESTORS: Yesterday, Elliott Associates reported a new activist stake in Gigamon in a filing with the SEC. With a combined economic exposure in the company of 15.3%, Elliott believes the shares are "significantly undervalued and represent an attractive investment opportunity," adding that they "intend to communicate" with the company's management and board about "a broad range of operational and strategic matters, and intend to encourage the issuer to undertake a strategic review process" including a potential sale of the company or certain of its businesses or assets. Today, Foglamp Capital voiced a similar opinion, saying it also believes Gigamon is significantly undervalued, and that the strategic review process that Elliott Management has recommended should unlock significant value. Foglamp Fund first acquired shares of Gigamon in January 2017, after the company pre-announced that it would miss its fourth quarter guidance, and has since built a significant position in the stock, the firm noted.

POTENTIAL SALE, MOVING TO THE SIDELINES: In a research note this morning, DA Davidson's Kelleher downgraded Gigamon to Neutral from Buy, saying that while he continues to believe the company's network visibility products provide a key layer of functionality in support of critical security and network diagnostic applications that should enable Gigamon to return to growth, the recent stock appreciation now seems to anticipate this growth. Following the announced Elliott Associates' 15% stake in the company, the analyst noted that the activist investor indicated that it would seek to work with management to explore all strategic alternatives. A sale of the company will be high on the alternative list, Kelleher contended, adding that possible purchasers would likely be network instrumentation companies such as Viavi (VIAV) or NetScout (NTCT). However, the analyst pointed out that NetScout is still in the process of digesting a fairly large purchase of assets from Danaher (DHR) and is probably not in a position to initiate another large purchase. Meanwhile, Credit Suisse analyst Kulbinder Garcha raised his price target for Gigamon to $43 from $29, while reiterating a Neutral rating on the stock, citing increased shareholder activism and potential for sale of the company after Elliott management disclosed a 15.3% stake in Gigamon in its 13D filings. The analyst noted that Elliott management's activism will lead to two most likely scenarios, namely improved execution, streamlining of the business, or a sale of the company. For the second option, Garcha sees potential interest from security companies, networking vendors and private equity firms.

WHAT'S NOTABLE: Yesterday, Atalan's Dave Thomas mentioned Gigamon as a long position at Ira Sohn Conference, which took place in New York, helping the stock extend the gains it was already seeing fueled by Elliott's disclosure.

PRICE ACTION: In morning trading, shares of Gigamon have dropped over 1% to $40.70. The stock closed yesterday session with a gain of about 17.5%.