A Closer Look at... Riverbed Technology Inc., Juniper Networks Inc. and F5 Networks Inc.

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While the shares of networking giant Cisco Systems Inc. ( CSCO ) tanked following last night's third-quarter earnings report, that doesn't mean that it is time to give up completely on the sector. In fact, the PowerShares Dynamic Networking ( PXQ ) exchange-traded fund ( ETF ) has surged more than 38% since the start of the year, versus CSCO's 1.4% decline for the same period, indicating that the networking sector is doing just fine without the blue chip's help. What's more, CSCO's weakness could open the door for its smaller and more nimble competitors to gain additional ground.

Juniper Networks Inc.

One company that stands to gain considerably from a decline in Cisco's dominance is Juniper Networks Inc. ( JNPR ). Technically, JNPR has paced its peers in PXQ, rallying roughly 29% since the start of 2010. What's more, the stock has outperformed the S&P 500 Index (SPX) by about 17% during the prior 60 trading days.

Taking a closer look at the stock's short-term performance, JNPR has soared along the support of its 10-day and 20-day moving averages since August. Furthermore, the shares have closed only one session below this duo during this time frame. Currently, JNPR is consolidating above support in the $34 region, after rebounding sharply from support at its 20-day trendline in the wake of a kneejerk round of selling following CSCO's quarterly report.

Daily chart of JNPR since August 2010 with 10-day and 20-day moving averages

On the sentiment front, options traders are bullishly aligned on the security, which is to be expected given JNPR's solid price action during the past several months. Currently, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.90 resides below 72% of all such readings taken during the past year.

Meanwhile, data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange ( CBOE ) points toward a rising preference for call buying. During the prior 10 trading sessions, the ISE/CBOE call/put ratio has risen to a reading of 4.46, meaning that calls bought to open have more than quadrupled puts purchased during the prior two weeks. This ratio also ranks above 99% of all those taken during the past year, meaning that options traders have rarely snatched up calls over puts at a faster rate in the past year.

This extreme preference for call buying may give some contrarians cause for concern, as it could indicate the presence of an excessive amount of optimism. However, calls are not always bought by those placing bullish bets. In fact, short sellers often buy calls to hedge their positions. What's more, the number of JNPR shares sold short spiked by more than 10% during the most recent reporting period, and now accounts for a respectable 5.25% of the equity's total float.

Not only does this tandem rise in short interest and call buying lessen the contrarian impact of the ISE/CBOE data, it also points toward a level of disbelief from speculative short sellers. Remember: negativity amid strong price action is one of the strongest contrarian indicators.

Finally, we turn our attention to Wall Street, where 14 of the 30 analysts following JNPR still rate the stock a "hold," according to Zacks . Additionally, Thomson Reuters reports that the average 12-month price target for the security rests at $32.41 per share - a discount to the stock's close at $34.55 on Wednesday. Any upgrades and/or price-target increases could provide additional buying pressure for security.

Traders should consider playing the stock's January 2011 33 call to take advantage of a continued JNPR rally.

Riverbed Technology Inc.

Riverbed Technology Inc. (RVBD) is another networking concern that stands to benefit by taking up the slack left in CSCO's wake. Fundamentally, on Oct. 22, the company posted a profit of $13.9 million, or 18 cents per share. RVBD also reported that sales spiked 45% year-over-year to $147.8 million.

The equity gapped sharply higher following the report, and is currently resting on an impressive gain of 158% since the start of 2010. What's more, RVBD has bested the SPX by nearly 49% on a relative-strength basis during the past 60 trading days. Taking a closer look at RVBD's technical backdrop, we find that the shares are consolidating just shy of all-time high territory, with support at their 10-day and 20-day moving averages rising into the area.

Daily chart of RVBD since August 2010 with 10-day and 20-day moving averages

Despite the stock's strong price action, options traders are quite bearish toward RVBD. Specifically, the stock's SOIR of 1.57 ranks above 73% of all those taken during the past year. Furthermore, the security's 10-day ISE put/call volume ratio of 2.65 indicates that puts bought to open have more than doubled calls purchased during the prior two weeks. This ratio also ranks above 78% of all those taken in the past year. This rising negativity toward RVBD among options traders amid the stock's rally has bullish implications from a contrarian perspective.

Finally, there is plenty of room for upgrades from the brokerage bunch. According to Zacks , 14 of the 25 analysts following RVBD still rate the shares a "hold." With the shares giving few signs of slowing their ascent, even after CSCO's poor showing, some of these pessimistic analysts may begin to reconsider their positions, potentially opening RVBD up to upgrades and additional buying pressure.

A January 2011 27.50 call appears well-positioned to take advantage of an unwinding of this lingering bearish sentiment.

F5 Networks Inc.

One final networking issue to consider is F5 Networks Inc. (FFIV). After the close on Oct. 26, FFIV forecast fiscal first-quarter adjusted earnings of 80 cents to 82 cents per share on revenue of $265 million to $270 million. The figures blew past Wall Street's consensus estimate for earnings of 73 cents per share on sales of $260 million.

Technically speaking, FFIV gapped nearly 15% higher following the report, eventually rallying to a string of fresh all-time highs above the round-number $120 level in the process. The stock is currently consolidating these gains above the $120 level, which has now been reinforced by FFIV's rising 10-day moving average. There is concern that the $125 level could become a short-term sticking point, but bullish investors should take heart that the stock has held up well in light of CSCO's poor guidance.

Daily chart of FFIV since August 2010 with 10-day and 20-day moving averages

Sentiment toward FFIV continues to shift toward the bullish end of the spectrum. The stock's 10-day ISE/CBOE call/put ratio of 1.36 indicates that calls bought to open have outnumbered puts purchased during the prior two weeks, with the ratio arriving higher than all but a quarter of those taken in the past year. What's more, there is plenty of room for this trend toward call buying to continue, as FFIV's SOIR of 1.22 ranks near the midpoint of its annual range, meaning that the bullish bandwagon is far from overcrowded.

Elsewhere, short sellers remain stubbornly bearish on FFIV. Currently, more than 6% of the stock's float is sold short, meaning that the equity could benefit from a round of short covering should the equity resume its march higher.

Finally, analysts have also refused to capitulate to FFIV's stellar technical and fundamental performances. According to Zacks.com , 12 of the 26 analysts following the shares rate them a "hold" or worse, leaving the door open for potential upgrades that could provide a stiff tailwind for FFIV. Traders might consider a January 2011 120 call to take advantage of FFIV's momentum and bearish sentiment backdrop.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.


This article appears in: Investing , Options

Referenced Stocks: CBOE , CSCO , ETF , JNPR , PXQ

Schaeffer's Investment Research

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