Update F5 Networks (FFIV)

When you’re a fast growing stock with a price-to-earnings ratio of 36 on trailing 12-month earnings, you’d better beat expectations.

Which is exactly what F5 Networks (FFIV) did when it reported earnings for the fourth quarter of fiscal 2011 on October 25. Earnings of $1.06 a share were 8 cents better than the Wall Street consensus. (F5 Networks is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

Revenue climbed by 24% year-to-year and earnings by 40%.

For the December quarter, the company issued guidance for earnings of 99 cents to $1.01 a share and revenue of $315 million to $320 million. That roughly matched Wall Street expectations for $1.01 a share in earnings and $320 million for revenue. Not bad guidance for a quarter that has led to lower projections by some technology companies.

Somewhat unusually in the current economic climate, F5 Networks talked more than a quarter ahead in its conference call. Read more

Should you go with the mo?

You know, momentum. The tendency of stocks that have been going up to keep going up (until they don’t, of course.) It’s a successful investment strategy built on the observation that stocks are the only thing that people want to buy more of as they get more expensive.

From the October 3 low through October 27, the Standard & Poor’s Stock Index was up almost 17%%. That’s enough to put thoughts of 2009 in anyone’s head. From the March low that year the S&P 500 rocketed ahead 13% in just about two weeks—and from there it had almost another 1,000 points to go before it topped out in April 28, 2011.

On the other hand, going with the Moe is one thing but nobody wants to be Curley or Shemp. The rally from the August 19 bottom to the August 30 high took the S&P 500 up 10%–but it wasn’t followed by another two years of roaring rally. Instead stocks reversed and by October 3 they had tumbled to a level below where they were on August 19. If you’d bought on August 30 after that 10% move upwards, you would have been left looking at a 9% loss by October 3.

So should you go with the mo? Should you hold positions that have rallied almost 17% or more in a little more than three weeks because momentum will take them higher? Should you buy in now if you’ve been sitting on the sidelines because you don’t want to miss out? Should you be taking profits and trimming positions to protect your gains from a potential downturn?

I’d love to be able to offer you some magic formula—“The inverse Mondavi function says this rally is going to 1364.3 on November 8—or astounding piece of fundamental wisdom—Comparing the multiples of the current market to all markets stretching back to 1843, shows that stocks will climb another 17%.

But I think the current market is best described as poised. The news flow can break either way, depending on what “solution” comes out of Europe in the next two weeks (when we have all the details we don’t have today.) Fundamentals can go either way with growth in Europe certain to slow but growth in the U.S. and Chinese economies set to come in either above or below the expectations built into stock prices right now. Technically, the charts show a market that may have broken through some tough ceiling levels where it’s still too soon to say if the trend will push through that resistance or falter and fall back from yesterday’s levels.

So what’s an investor to do? Read more

I don’t think stocks have broken their long-term upward trend but that’s a worry that means this market will take a while to base

You’ll be hearing a lot of talk over the next days and weeks from the technical analysts about the damage that’s been inflicted upon the condition of the markets. That’s one reason, they’ll say, that this market won’t bounce back immediately from its extremely oversold current condition and begin a new rally.

But what does that mean when you translate it?

Actually, it’s pretty straightforward. What the technicians are saying is that the market’s plunge has taken stocks down to levels that make it hard to tell whether this is a short-term correction in what is still a market that is trending upward in the longer term or if this drop has broken the longer-term upward trend and the market is about to drop further.

For a while it was possible to believe that this decline would take the Standard & Poor’s 500 back to its November 2010 lows near 1170. Read more

Apocalypse now?

I haven’t heard anyone breathe the phrase but we’ve come close this morning.

Here’s Mr. Bond, Pimco’s Bill Gross yesterday on Bloomberg TV: “We’re not looking at a recession yet, but we’re at a tipping point.”

And here’s Harvard’s Martin Feldstein, chairman of the Council of Economic Advisors to President Ronald Reagan: “This economy is really balanced on the edge. There’s now a 50% percent chance that we could slide into a new recession.”

I love the smell of fear in the morning. It usually signals that a buying opportunity is approaching.

Through yesterday the seven-day slide (continuing so far today) has wiped out the total year-to-date gain in the Standard & Poor’s 500 and erased $1.1 trillion in U.S. stock market value. Yesterday’s 2.6% drop in the S&P 500 is the biggest loss in a year, and this seven-day downturn is the longest losing streak since October 2008 in the depths of the global financial crisis.

Technical indicators are now reading “oversold” with many showing the most oversold reading since July 2010. The S&P 500 bottomed on July 1 at 1027 that year. The subsequent rally took the market to its April 27 peak of 1356 on the S&P 500 for a 32% gain.

The problem with oversold readings is that an oversold market can get even more oversold before it begins to rally. Read more

Right now the market reminds me of a set of Russian matryoshka dolls. You know the ones that, traditionally, begin with a peasant woman, and then reveal small and smaller carved dolls nested inside one another, until the last doll is, traditionally, a baby.

This stock market, in my opinion, shows a short-term July rally inside a summer slump, inside an emerging markets rally, inside a liquidity-fueled boom, inside a liquidity-fueled bust.

That’s why right now when any one asks me “What do you think of the stock market?” my first question is “Over what period?”

Let me start with the innermost doll and work outward.

Welcome to the (relatively short-lived) summer rally. From 1950 through 2010, according to the Stock Trader’s Almanac, July has been the sixth best month for stocks (measured by the Standard & Poor’s 500 stock index. June, in contrast, has been the third worst month.

This year the market tanked to a very over-sold condition in June, setting up a July rally. All investors have been waiting for, as stocks got cheaper and cheaper, was a break in the consistently negative news flow of May and June.

Well, we’re sure getting that break in the negative news flow. Greece and the European Union look like they’ll succeed in their efforts to kick the Greek and euro debt crisis down the road. The European Central Bank has just about guaranteed that it will raise interest rates on July 7—producing a euro rally against the dollar that will do wonders for commodity prices. (See my post on the Trichet rally http://jubakpicks.com/2011/06/29/euro-interest-rates-to-climb-in-july-and-stocks-should-follow-along/ ) China’s Premier Wen Jiabao has declared victory against inflation (http://jubakpicks.com/2011/06/24/china-conquers-inflation-premier-wen-says-so-and-what-does-that-mean/ ).

It’s important to remember that in the short-run it doesn’t matter whether or not any of this news is actually true. All that counts is that investors, temporarily, will themselves to believe.

And if you can judge from the technical charts, and I think you can, they believe. Yes, they do.

In the last few days, U.S. stock indexes have rallied from support at their 200-day moving average, offering evidence that last week marked a short-term bottom, and that the indexes are ready to move back to resistance at their April highs. This is true for the Dow Jones Industrials, the S&P 500 and the Nasdaq Composite.

Sectors, such as energy and materials, that had led the sell off in May and June, are bouncing off their 200-day moving averages too in anticipation of a weaker dollar.

Overseas markets show the same pattern. The iShares MSCI EAFE index (EFA) has recovered to its 200-day moving average. (This index is weighted 66% to European stocks and 20% to Japan, so it should rally strongly with an appreciating euro.) The iShares MSCI Emerging Markets index has bounced so strongly off the 200-day moving average that it is now threatening to move above its 50-day moving average.

Don’t get too excited by this July rally. Read more