I am usually cautious around earnings season since the bipolar knee jerk reactions to a company based on 90 days of business and/or a few phrases on future guidance, are not something I like to be whipsawed with. But the past few weeks I wrote quite a few times this earnings season is especially fraught with danger. Many stocks have run up since their last earnings report without pause, to the tune of 30, 40, 50%, and valuations have gone ballistic. The type of investors who pile in are the momo chasers who often do little research other than to see which stocks are the to of the Investors Business Daily Top 100 list, and away they go. Everything is wonderful, when stocks only go up… until they don’t. Indeed just this afternoon I warned on one of the companies I’ve been a big proponent of the past few years – F5 Networks (FFIV).
Meanwhile, story stocks like Cree (CREE) are being crushed, which is another warning for those who are playing high multiple and/or story stocks right now – so many have put 1-2 years worth of gains in 120 days, it’s a very dangerous environment for blow ups as expectations are off the chart. I’d be very wary of even favorites like F5 Networks (FFIV) which reports tonight…
This comment had nothing to do with any special insight into F5 Networks, and everything to do with the conditions outlined above. Priced for perfect (in this case 40x forward earnings) does not work well, when the company does not continually raise the bar. Guidance was just not good enough to satisfy the tribe… heck they even stumbled a small bit on this quarter’s metrics.
So what happened to FFIV investors this evening? They are facing a haircut of nearly 1/4th of their investment. Easy come …. easy go. Poof – 3 months of gains, gone in a few minutes. The stock is down to $106/$107 in after hours and we have another “fill the gap, the hard way” candidate. You can expect that late October 2010 gap of $104 to be ‘filled’ tomorrow.
Look for knock off effects on such high fliers as Riverbed Technology (RVBD) and Acme Packet (APKT) tomorrow. (even though they don’t do the exact same thing as F5 Networks, but most “investors” in these names nowadays don’t understand the differences) RVBD is actually already down 10% in after hours… Acme Packet nearly 7%, I am sure there are quite a few others in the internet infrastructure space being taken to the woodshed tonight.
Still a quality company with lots of potential? Yes. Still a company I plan to own at some point in 2011. Yes. More of a value now than it was a few hours ago? Yes. But near term? Ugly. All the momentum chasers will exit, and all the technical traders are will scurry like roaches once the kitchen light is on. It is going to take some time for a new positive technical setup to be created here. Perhaps an interesting entry can be created at the 200 day moving average just over $101.
There are a lot of F5 Networks out there as the Bernanke put has created an air of immortality amongst investors. Indeed many others have even more air pockets in their chart that FFIV has. As we discussed today – be careful out there, you don’t want to be trampled by elephants.
(full report here)
Disclosure: No position