SWI: Selling simplicity

SolarWinds Inc. (SWI) makes software tools used by companies to manage their computer servers, networks, email and database servers, information storage and, most recently, their cloud, the great way-out-there where increasingly our music and photos and much more live.

The Austin, Texas company has more than 93,000 customers globally, ranging from giants of the Fortune 500 to small businesses. Their motto is, "Unexpected simplicity".

Despite the name, SolarWinds has nothing to do with solar power or with moving spacecraft across the solar system using giant sails to ride the stream of molecules shot out by the Sun.

SWI had the most bullish chart among 16 higher-volume stocks out of 26 added today to the Zacks top-buy list.

On the chart, SWI began its most recent leg up on May 21 from $44.29 and today hit an all-time high of $48.42. That bump was a breakout from a sideways trend in forde from April 27, and the price quickly retreated back to within the range and at this writing (about 1:45 p.m. Eastern) is down intra-day.

A 32% positive earnings surprise prompted an 11% opening gap to the upside, setting up the trading range in effect so far this month.

SolarWinds has return on equity of 28%, quite a high level, with no long-term debt. That makes it a growth stock under my definition.

Institutions own 79% of shares and have bid up the price to an extraordinary level. It takes $16.47 in shares to control a dollar in sales.

SolarWinds has produced 12 quarterly earnings surprises in a a row. Earnings the last two quarter have  been on a plateau, slightly below the quarter before, which set the peak of past few years.

On average SWI trades 963,000 shares a day. The options selection is adequate, as is open interest. The bid/ask spreads are also fairly narrow for a stock trading at a volume that low.

Implied volatility stands at 47%, a bit below the midpoint of the six-month range. It has been rising this week after taking a sharp tumble.

Options traders are pricing in a 68.2% chance that the stock will close between $41.01 and $53.85 a month from now, for a maximum gain or loss of 14%.

Decision for my account: The cautious trader will wait for a decisive breakout above the recent price range, call it above $48. Those who want to benefit from a sharp breakout rise -- and breakouts often are sharp -- will either open a bull position now or wait for the next intra-day rise. I would play SWI as options rather than shares.

However, I won't be trading SWI at this point. My trading funds are fully committed.

Methodology

I screened the stocks using a tourney bracket with a six-month daily chart and a five-year weekly chart. See my essay "10,000 Charts" for a discussion of my screening methods.

Disclaimer

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.