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Arista Networks- Waiting for the Other Shoe to Drop

By Rick Walter
02/14/20
4:00 PM

Cloud storage and solution companies are the next up and coming hot area for investment. Companies like Amazon and Microsoft are competing mightily for this business and winning. However, there are other smaller or mid-size players in the field that could also be huge winners in this growing, lucrative market.

I started following Arista Networks in the 3rd quarter of last year. Since that time the stock has fluctuated from a high of $249.49 on Sept 12, 2019, to a low of $185.30 on November 1, 2019. The stock since then has ground back up to the $240 range on February 12, 2020, only to fall back to the $218 price levels after earning announcements on February 13, 2020.

The numbers weren’t bad but they weren’t that good either. I listened in on the company’s webcast yesterday and I was not impressed with the presentation. The overall guidance for the upcoming first and second quarters for this year was very confusing. I couldn’t tell if the company was forecasting breakeven for the upcoming quarters, a slight loss, or a huge loss. Based on the previous 3rd quarter webcast last year, company officials reiterated that one of their major customers- (a cloud titan) who’s responsible for a good portion of their revenues, had not made a commitment or firm decision to continue to use their products and services going forward. Company officials said that they had to adjust to this uncertainty going forward. Fair enough.

However, in the fourth quarter, nothing was mentioned of this pending doom to the company’s revenue base and bottom-line. Instead, the company focused on collective doom stemming from the cloud industry itself. Huh! Analyst after analyst threw a multitude of questions that would or could shed light on the growth issues but were unable to pierce the cryptic responses from company officials.

This company initially fit our criteria for innovative product and services, consistent earnings per share growth and stable management with the ability to identify the risks in the markets and make prudent decisions to adjust to those risks. However, this company fails miserably in the management section. Just listen in on their earnings webcast and you will get an idea of what I am talking about. Is the stock a buy? We are uncertain, because no one could get a straight answer during the earnings call. Namely, “why is the company experiencing slower growth than most companies in one of the hottest growth markets today?”

We are holding off purchasing any more shares in this company until we can get better and clearer guidance. If management can’t give you a clear answer, then why should we or any other investor invest in the company?

We own shares of stock in Arista Networks.

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Cyberark’s Stock Price Collapses

By Rick Walter
Updated: 02/13/2020

Cyberark Software Ltd., CYBR stock cratered today after their earnings announcement. I listened in on the company’s webcast on Thursday and the presentation was pretty solid. There was nothing in the webcast that was materially incorrect or shockingly bad. The company reported solid numbers in revenues, gross margins, r & d, sales and marketing, and general and administrative expenses, yet the stock sunk like a stone in a sea of positive earnings announcements.
The company reported earnings per share of .97 per share versus expected fourth-quarter earnings per share of .81 per share, a 20% increase. Revenues came in at $129.66 million versus expected revenues of $126.67 million, 2.36%. Year over Year (Y/Y) revenues were up 27.72% with net income also up 88.39%.

From a valuation metric, the stock was fairly valued as of Wednesday’s price of $138.60. Today’s collapse puts the stock in undervalued territory by at least 10% based on current valuation computations.

We believe based on the line of questioning by analysts on the earnings webcast, that there may be some confusion on whether the company grew earnings per share and revenues by actually adding new customers or manipulated their numbers by reformulating or remixing the pricing of their existing product and product solutions to generate higher revenue fees thereby increasing fourth-quarter earnings per share and revenues.

Is the stock still a buy? We think so based on year over year numbers and because the stock fits our criteria for investment based on their innovative cyber-security products, consistent earnings per share growth and excellent risk management stewardship. However, proceed cautiously.

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The Rise of Pinterest

Rick Walter
Updated: 02/10/2020

Pinterest Logo

Finding and investing in companies with a proven and stable track record of growth is very difficult especially with startups. We select companies based on three criteria: innovation, earnings per share growth, and risk management. We believe that the best companies are leaders in these areas. How companies manage these areas over time determines how much or how large your investment can grow.

Pinterest Inc. PINS came to mind this week as a company that may do well over the long-term. The company reported better than expected earnings of .12 per share versus .08 per share, up 44% and higher revenues of $399.90 million versus expected $368.93 million, up 8.39%. This is impressive because the company just went public last year on April 18, 2019. In less than one year the company has evolved from test case into a real company that is growing market share and making money.
The stock is undervalued based on valuation metrics which suggests a fair value price of $35 per share. The stock closed at on $25.20 Friday February 9, 2020. The difference between the where the stock closed, and its fair value is approximately 24.5%. We believe that the company can easily close that gap because on the growth side the company provides users and marketers with an array of easy to use tools that facilitates taking ideas and concepts from just that to reality quickly and easily.

Although, Pinterest is not the only company that’s doing this; however they are at the forefront of providing the technology for users that’s growing revenues for the company. Secondly, the company is seeing surprisingly strong growth in the international market and management seems to have an intelligent grasp of the market and responds accordingly to the risks and uncertainty as the company grows. We think the company fits all three of our investment criteria and is a company to keep on your watch-list for future growth. Pinterest’s stock is just one of the stocks that we own in our portfolio.

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Searching for Value

ConfusedBuying undervalued stocks in the markets can be a very good long-term investment strategy for many investors. However, the process can be very difficult sometimes and near impossible for the average investor. Meaning an investor that does not invest on a daily or weekly basis but who may own a 401k, IRA, Roth at their […]
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Volatile Week Ahead!

1/28/2019 It looks like it is going to be a volatile week. There’s lots on the table to consider. Today marks the start of the IRS e-filing season and what may turn out to be a very tough month for the IRS. We are seeing many reports suggesting that parts of the agency may still […]
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Market Update

Market Update
12/27/2018
By: Rick Walter, CIO

 

Political uncertainty
It was a tough year to make any profits using our index-based approach to investing, as the markets continued to move downward in lockstep with political drama domestically and internationally. Our tech-heavy, simulated portfolios were no match for the widespread panic and fear that gripped the overall markets.

Dow, S&P 500 and Nasdaq sell-off
It’s hard to find a fund or asset manager that have not been affected by the continued market slide which started on September 21, 2018- (a market high). As the year wore on, nothing seemed to matter, as panic continued to grip the entire market causing many investors to sell otherwise very good positions in companies whose earnings were very strong in the previous quarter with many companies earning above analyst consensus and market expectations.

Continued Volatility in 2019
Based on my experience and analysis this intense sell-off is a combination of a structural selloff- stemming from the unintended consequences of the 2018 tax law, developing economic headwinds and political uncertainty in Washington (a perfect storm of events). These events and others will continue to rumble through the financial system and cause massive losses for many. We are expecting continued volatility and heavy selling to continue, through 2019 and possibly into 2020.

Don’t try to buy on the bounce because there isn’t one. Averaging down or up may be the only medicine of the day. We prefer that investors pause and not make any new investments currently. Other strategies may include moving to more liquid investments like treasuries until there is some type of real political leadership in Washington.
If you need to harvest capital losses for 2018 tax preparation, you should have no problem at all finding losses to write-off. There is plenty to go around.


Have a Happy New Year in 2019!!

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Cost of Procrastination

Retirement is one area where procrastination can be particularly dangerous to your financial future. Procrastination costs money. It doesn’t pay to put off financial plans. Start taking concrete steps towards your financial goals. If you had decided to invest $10,000 at 8 percent 10 years ago, and another person waited 10 years and then invested […]
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