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Market Conditions Point to Long Term Run Up


Evidence could be indicative of the precursor conditions for a run like we had following 1998's huge mid-year correction


In general companies tied to the liquidity constrained food chain are throwing kitchen sinks and babies out with the bath water. The good news is this bad news is getting quickly priced in and in some cases may already be overly priced in.

I believe that the corporate spending food chain will hold in or even excel in some areas. Even banks and brokers will still spend on key cost saving or efficiency generating technology -- and they will certainly put a lot more money into their quantitatively driven risk management programs.

While everyone is making assumptions about how deep this recession is going to be or how long it will last -- the evidence I'm seeing could also be indicative of the precursor conditions for a run like we had following 1998's huge mid-year correction (bear market for NAZ).

In fact, given the amount of stimuli, the possibility of a good portion of current charge-offs becoming earnings windfalls over time, as well as the extremely low readings on year end inventory throughout the US manufacturing complex--the conditions for a market melt up (I will not use a certain over-used word here)--are coming into view.

But all this comes with the caveat that I'm forward looking, this is my forecast and I'm usually early:

F5 Networks (FFIV)

It had a solid report meeting expectations and solid guidance into what was about the most negative sentiment that FFIV has had into a quarter since 2002. As with many companies outside of the the Finance and Real Estate areas, this quarter was nothing like the kind of quarter you would see either preceding or in the midst of a recession. It was not a blowout growth quarter either, like you might see during "peak" EPS growth cycles, but with FFIV's P/E of 20, PEG of 0.91 and a forward P/E of 15 on what are probably conservative assumptions the stock is cheap.

Additionally, this next product cycle for it should be strong, even in a muted tech spending environment. The growth of network traffic isn't slowing down globally and in fact may be due for another major burst in growth over the next couple years. I also like the Acopia Networks deal for the second half and 2009. I know Merrill Lynch issued a report essentially implying that huge cash balances are something to be concerned about. Heck, in these tough markets I still want the tech stocks I'm invested in to have very strong balance sheets and lot's of cash. FFIV as an enterprise is trading under 4 times net cash, and FFIV will be using some of that for a stock buyback.

Qualcomm (QCOM)

As I pointed out a couple days ago in a note on Skyworks Solutions (SWKS) and QCOM, I thought QCOM was trading very cheaply given what looks like at least solid end market for 3G and other enhanced handsets.

For the quarter QCOM reported revenue of $2.44 billion, with pro forma EPS of 52 cents -- inline with the Street at $2.41 billion and 53 cents. Guidance was $2.4 billion to $2.5 billion, with EPS of 50-52 cents versus expectations of $2.44 billion and 52 cents. Full year numbers are: $9.6 billion to $10 billion, EPS of $2.01 to $2.07 versus expectations of $9.83 billion and $2.12. However, QCOM's numbers do not include royalties due from Nokia (NOK) so the fact that QCOM's numbers are that close to the Street is actually showing fairly strong annual guidance.

Citrix Systems (CTXS)

The company crushed the current quarter. It reported revenue of $400 million, beating the Street consensus of $380.4 million. Non-GAAP EPS of 49 cents beat the Street by six cents. For the first quarter, the company sees revenue of $367 million to $377 million, with non-GAAP EPS of 33-35 cents. The Street has been looking for $367.6 million and 35 cents. For all of 2008, Citrix sees revenue of $1.615 billion to $1.645 billion, with non-GAAP EPS of $1.61 to $1.64. The Street has been looking for $1.61 billion and $1.62.

So all in all, it's very solid and CTXS is another company with a gorgeous balance sheet. At some point large net cash positions and superior balance sheets will be rewarded.

eBay (EBAY)

It had a great current quarter but lowered the bar quite a bit. EBAY has been known to give conservative guidance from time to time, especially in times when the whole retail segment get strained. It is not immune from consumer slowdowns, nor is Amazon (AMZN). However, most brick and mortar retails would kill for EBAY's current growth and margins as well as ownership of PayPal. EBAY will recover nicely off whatever price it decides to finish its current washout.

Also, the results from QLogic (QLGC) were interesting, the rebound of China Digital TV Holding (STV) off of yesterday's lows was notable. The action in (BIDU) has also piqued my interest.


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Position in FFIV and STV.

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