Selling A Router Stock and Looking for Greener Pastures
Back in September I heard from a lot of you who had dreaded trimming some of your shares in Apple before the release of the iPhone 5 and because the stock had continued ascending you felt like you had “missed the top.” What I said at the time was that our “buy and hold and trade frequently” strategy has worked quite well over the years and that’s why we buy on weakness and sell after a run. I added,
“Guess what? There will always be ways you could have nailed that trade even better. By adding on weakness and trimming on strength, you’re having your cake and eating it too. You’re making more money than you would have in a buy-and-hold approach, and you’re also reducing your overall risk by keeping flexible as stocks move over the long run.”
It’s a time-tested approach, and right now we’re pretty happy we trimmed some of those shares of Apple before its $120 per share plunge.
Another important tenet of the Revolution Investing strategy is knowing when to cut your losses and move on to greener pastures. This week we’re going to sell a names that hasn’t lived up to our expectations: we’re selling Juniper.
By selling now we raise some cash that we may then redeploy into some of the more beaten down names that stand to perform well over the coming holiday selling season (did someone say Apple?). I’ll let you know if/when I add to existing positions like Apple or Google, but today let’s discuss what’s going at JNPR, and why we’re selling.
JNPR is in the carrier router space, it’s effectively the number two player after Cisco. The shares popped a couple of weeks ago on rumors that EMC might buy the company, but EMC CEO Joe Tucci laid those rumors to rest in his company’s quarterly conference call a few days later. He also made a point of saying he sees opportunity in Software Defined Networking (SDN), which is the latest trend in networking technology and to which Juniper is a relative newcomer. Juniper’s disappointing earnings proceeded to knock the share price down another couple of points to a low of under $16/share. It has since recovered to the mid $17 per share price level.
At its current price, and backing out nearly $6 per share of cash, Juniper trades for a reasonable 10.3x forward earnings. But in its most recent conference call management was very cautious about the outlook for the next few quarters. Sales in the Americas are flat, Europe continues to be weak and Asia was described as “stable.” Revenue in 2013 is now expected to grow at around 7%, and until Juniper gains some traction in SDN there is no reason to expect substantial multiple expansion. I still like the long-term story at Juniper, but as noted above, there are probably some names in our list with more compelling near-term catalysts.
Stick with the program, don’t get emotional and know when to cut your losses. We’re getting out of Juniper essentially flat. But rather than sit on our hands waiting for the stock to recover, we’re going to look for near-term opportunities that may be better positioned for a rebound heading into the end of the year.
Let’s also update you on FFIV, which sells networking equipment and solutions to enterprise customers, and is a leader in Application Delivery Networking (ADN). Its technology is used in cloud computing, which is still exploding. That said, the economic “recovery” has slowed and FFIV management said in its most recent earnings announcement that its large U.S. customers simply aren’t making large purchases at this time. Revenue growth in the quarter came in below expectations and the company also lowered its expectations for the next quarter. Analysts have lowered their estimates for FFIV’s 2013 earnings, and while the company still has significant cash on the books—about $1.2 billion or nearly $15 per share—based on the newly lower earnings forecast, FFIV is still trading at more than 14x forward earnings.
Its service revenue grew at a strong pace, and FFIV has a significant product update cycle coming next year. The biggest concern I have right now is that it looks like there will be plenty of time before the share price responds to any corresponding improvement in sales.