Monday, April 9, 2012

PKT: Tools for Cloud management

Procera Networks Inc. (PKT) sells tools that enable the smart people who manage networks to do their jobs better.

For most of us, networks are a misty cloud that is somehow involved in bringing stuff to our screens when we click or tap. The reality is that the Internet and large local networks run on an immensely complicated infrastructure that requires constant monitoring and maintenance to keep running.

That's where Procera comes in. It makes the tools that the network folks use to manage the Cloud.

Procera, headquartered in Fremont, California, had the most bullish chart of 16 stocks added over the weekend to the Zacks top-buy list. 

Today is a broad down-day in the markets, an environmental fact that PKT has ignored, recording a higher high of $23.77 in an uptrend that began Jan. 11 at $14.37.

I'm partial to infrastructure companies. They lack the glitter of an Apple or Coke, but they provide basic necessities, which Apple and Coke assuredly do not (unless hipness and cavities be necessities).

The downside for some infrastructure domains, of course, is that the market can be limited. Procera sells to companies with very specialized needs. At the end of 2009 it had around 500 customers that had installed 1,300 of its systems. This is not a mass market, although the companies using Procera products may themselves serve mass markets.

PKT's current leg up is part of a broader uptrend that began in July 2010 at $4.10. That longer-term rise has been marked by three corrections, including one in 2011 that lasted for four months and carried the price down to about half the peak.

The stock is trading right below a major resistance level, at $24, set in 2008 before the price tumbled downward during the recession.

Procera has a 12% return on equity, and no long-term debt. The return is too low for a growth stock, but the lack of debt gives the company recovery powers lacking in its debt-ridden cousins.

Institutions don't have an especially strong presence in PKT, owning 57% of the shares. The price, however, is extremely high. It takes $7.73 in shares to control a dollar in sales. (By contrast, Apple's pricing is $4.62 in shares to control a dollar in sales.)

The company suffered deep loses in 2010. Since showing a profit in 2011, its earnings per share have been inconstant. There is no earnings acceleration here.

The stock, while liquid, has lower volume than I like to see, trading only 262,000 shares on average. Yet the options inventory for My has 12 strikes with strong open interest on the call side, but not for puts.

The bid/ask spread is a bit wide, but not to a ridiculous degree.

The grouping of the open interest suggests to me that there is a lot of speculative play in this issue. That's good if the price continues to rise, but it can also mean a lot quick exits if the price falters.

Implied volatility is near historic lows but is extremely high, at 58%. (Compare that to the S&P 500, where volatility stands at a mere 18%.) Again, that level of volatility suggests a lot of speculation.

Implied volatility hit a six-month low of 54% in mid-March, and has since gradually risen to the present level.

Procera next publishes earnings on May 7.

Decision for my account: Volatility is the mother of profit, so I like speculative stocks a lot. But I'm also a fan of liquidity. I want to have a good chance of getting out if things go sour. The nearby resistance level at $24, old though it might be, also causes me concern.

If I were to play PKT, it would be either as long calls (most risky) or vertical spreads (less risky), or even shares (least risky). But because of the  liquidity, the nearness of resistance and, frankly, the flakiness of the market in recent days, I'm passing on PKT. Were the price to push decisively above $24 or the market to turn unambiguously bullish, I would revisit the issue.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
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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