Monday, January 30, 2012

EQIX: Future memes

Equinix Inc. (EQIX), from its headquarters in Foster City, California, south of San Francisco, runs data centers to serve its 35 markets in the United States and Europe.

It plays into the future memes of our time: Cloud computing, global integration, customer experience. It provides the robust bones and sinews that give strength to early 21st century enterprise.

Given the forward nature of its business, I find it amusing that its chart maps nicely to that of almost any sort of enterprise -- new tech or old -- that went through the recent recession -- a decline from 2008 into a major low in 2009, and a strong recovery thereafter, although one marked by stumbles.

What makes the EQIX chart stand out today is that last week, on Jan. 26, it moved above its pre-recession  high for the first time, hitting $121.75. In the ensuing two days of trading, the price has pulled back, but it is positioned for a breakout, and that makes it worth a closer look.

EQIX had the best chart, in my judgment,  of 16 stocks picked at random from a pool of 675 large capitalization companies.  (See my essay "10,000 Charts" for a discussion of how I screen stocks.)

The price began its most recent upswing on Oct. 4, 2011 at $82.43, a rise that picked up serious momentum beginning Jan. 5 from $100.47.

For the momentum trader, the question is whether the price will push decisively past its $121.75 high into a further upswing. No one knows, but the fact that the stock is trading, for a third day, within the range of the breakout day suggests there is powerful sentiment for the bullish case.

Analyst opinion, on average, views EQIX as a strong buy. The financials, however, don't paint EQIX as a growth stock. The return on equity is only 4%, and debt-to-equity is high, at 1.51.

And it's expensive. It takes $3.77 in stock to buy $1 in sales -- no surprise, with institutinoal ownership at 97%.

So for the trader, EQIX lacks subtlety. This is no stealthy play. EQIX stands up and shouts, "Hey, I'm a hot stock. Buy now! Look what I've already!"

The stock has average volume of 1.2 million shares, and the options selection is quite good, running from $55 to $140 for the February expiration, mainly at $5 intervals. Open interest runs as high as 3,000-plus.

The trader's question is this: Since EQIX is so obviously hot, has everyone already gotten on board? Is there more money waiting to come on board and drive the price higher?

The most recent rise was on increasing volume, suggesting that there is still buying interest.

Implied volatility is somewhat high, standing at 51%, up from 38% on Jan. 6, when the present rise began. High volatility is generally something I like to sell -- through short options positions for a net credit.

Decision for my account: I've opened a February bull put spread, short the $115 strike and long the $110 strike, for a net credit.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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