The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

24 October 2007

Some measure of clarity amid the turbidity

I stated the following remark this past Monday in reply to a reader's question...

"I like Riverbed/RVBD, but the timing of your purchase defies my methodology; you purchased nearer the top end of a rising channel, and thus maximum risk. That is, you purchased risk, not opportunity -- at least, short term."

I deem it important to show what I merely stated previously, especially because RVBD shares are set to open lower, much lower.

As I identify it, risk manifests along the upper channel line and reward (opportunity) manifests along the lower channel line. (For more understanding how to identify correct trend lines, please see my post, Trend Lines Primer. Although the post does not share the techniques of how to identify correctly a trend channel. Perhaps fodder for a future post.)

Thus, when the reader mentioned he purchased near the top channel line, I responded as I did. He purchased maximum risk. Due to yesterday's earnings report, the stock appears set to open at double crucial support, as identified by the 200 day simple moving average (at $37.84) and the current plotting of its lower channel line.

"Baird notes RVBD reported revenues slightly above expectations, EPS in-line, and guidance slightly better. Outperformance was modest relative to previous quarters, which will cause concerns over diminishing upside to estimates. RVBD is investing heavily to sustain growth, so operating margin expansion is weighted toward 2H 2008. Firm maintains Neutral rating and lowers target to $42. RVBD is the market leader in an exciting segment, but they remain on the sidelines as they believe expectations are lofty."
Make no mistake about it, this was a tremendous quarter and earnings report; however, it always is problematic when a growth company's rate of growth slows down. And thus the reason for the large gap down, disappointment.

But will the lower trend channel line and the 200 day sma stem the decline from becoming worse and manifest a fresh opportunity (maximum reward, lessened risk)? Or will the stock plum lower lows, as Wall St sells (punishes) the stock for slowing sales in advance of increasing competition. (As Pat noted.)

We will know soon enough.
-- David M Gordon / The Deipnosophist

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