the Yuppie Pig

This is an aggressive trade as it is already well off its highs from several months ago. China is also very oversold but this could measure much farther down.
Here's one with a tight stop and clearly defined targets.
The volume is what makes this one attractive as a short. Volume declined as the stock moved higher, and now as it is falling, the volume is increasing drastically. It also has a nice round support number at 20.

• Our first quarter net sales grew an impressive 77%, driven by shipments of 650 million K-Cup portion pack system-wide, up 82% from last year.
• Total brewers sold during the quarter equaled 1.47 million, which are 755,000 more brewers compared to the 711,000 sold in Q1 of 2009.
• The significantly higher brewer unit sales combined with a 158% increase in K-Cup sales to retailers and to consumers from Keurig.com propelled Keurig Q1 sales to 218 million, up a 106%.
• Due to our strong first quarter financial results, we are raising our expectations for fiscal 2010 EPS from prior estimates of $1.85 to $1.95 per fully diluted share to a range of $1.95 to $2.05 per fully diluted share excluding any one-time acquisition-related transaction expenses

Not bad at all for a not-so-little coffee outfit!

The stock has also performed admirably. You would hardly notice the decline in the S&P if you owned this stock which is up over 9% today alone. It is also one of the few names not to be sold on the news. Perhaps today's move was a good amount of short covering as I'm sure speculators may have been expecting the stock to break down below 80.

Given the impulsive downward move, I would have to say that the overall corrective move is not over. Typically, these tend to move in 3 waves. The first being a thrust down followed by a short bounce up and another thrust down. Right now, I suspect we will get some type of bounce here at support and potentially retrace part of the decline back to 1115 where another leg down will would begin. As I write this, I see that the futures market is up 5.7 points on the S&P500. Could it be them?

A few bearish observations

1. China, which has lead the market, has shown considerable weakness lately. Many Chinese stocks, ETFs and indices have broken down after a period of high volume choppy trading (distribution).
2. The Generals have all fallen. AAPL, GOOG, AMZN, GS have all been dealt considerable blows.
3. Reaction to earnings (even good ones) is to sell immediately.
4. Headline political environment is becoming a mine field.
5. Recently, we have seen a far larger share of tiny speculative stocks making breakout moves. Typically, this is a sign that the higher quality names have already had their moves, and money is now chasing lower quality names which tends to happen at tops.

Longer Term Trend in Question

On the daily chart, we can clearly see the damage inflicted last week. Yet, when I take a step back, I have yet to see a series of lower highs and lower lows which are characteristic of a downtrend. However, we are well on our way towards carving that out. By the time it is officially a downtrend, we will probably be somewhat lower than we are today. With some attention to the shorter term action and good setup selection, we should be positioned short as it develops. Confirmation would only serve to adjust our level of aggressiveness. Volume has also been particularly heavy in this round of selling.

And none yet so far...

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So here we are again, and I'm going to issue yet again, the exact same warnings I did on the weekend and risk sounding like a broken record. We've broken out of the rising channel yet again, but have not broken through support. Tomorrow, like yesterday, we'll evaluate how the bounce plays out. Until then, we are in another range bound box and it is not the time to push hard on the long side or the short side. For short term traders, all longs and shorts should be considered just that... Trades.

Yes... and that "box" between 1130 and 1150, seems familiar too!

1. Rackspace (RAX)
2. Terremark Worldwide (TMRK)
3. Google (GOOG)
4. Salesforce.com (CRM)
5. Equinix Inc. (EQIX)

• Earnings 0.37
• Revenues 754.30M
• Growth 22.12%

Rackspace is probably the most "pure play" of all the cloud computing stocks. For this reason, I also believe it deserves a premium. It's small size makes it a nice acquisition, at the right price. If I use a 2x growth PE on forward earnings of 0.37, I come up with a $16.37 stock. The stock currently trades at $21.95 as I write this. That implies an approximate 60 forward PE.

Terremark Worldwide (TMRK) (FY 2011)

• Earnings -0.03
• Revenues 348.70M
• Growth 22.5%

Terremark can't be valued the same way as even its FY 2011 earnings estimates are negative. However, it does have revenues of 348.7. This is about half that of Rackspace. Let's assume for the moment that margins remain inline with Rackspace. This would put the value of the company at about $7.56. (348.7/754.3 x 16.37) Alternatively, If I price it using the market value of Rackspace trading at $21.95, it yields $10.15. As I write this, it is trading at $8.20.

Google (GOOG)

• Earnings 26.47
• Revenues 20.49B
• Growth 21.34%

Google obtains very little of its revenues from its cloud computing services, however, I think that is one of its significant sources of long term growth. I'll apply the same valuation method here, knowing that it still would not be an apples to apples comparison with these other firms. With forward earnings of $26.47, a 21.34% growth rate (I find this a bit suspect as I don't think it can maintain this rate on a base revenue of over $20B), and a PE premium of 1.5x growth, this yields $847. However, I think one has to consider the prospects of Google pulling out of China as a serious long term impact to growth and thus, I feel its reasonable to reduce its long term growth by 5%. This is somewhat of an arbitrary number, as is the PE premium, so feel free to use what you like in your own comparisons. This new valuation yields $649. The stock is currently trading at $587.

Salesforce.com (CRM)

• Earnings 0.83
• Revenues 1.50B
• Growth 37.5%

Salesforce.com is probably the best implementation of a cloud computing business model to day. It clearly deserves a premium, but let's see how far that takes the valuation. Earnings of 0.83 with a whopping 37.5% growth rate. I'm not sure how much I buy that as a long term growth rate (5 year run rate), but lets assume it to be true for the moment. Thus, applying earnings of 0.83 x 37.5 x 2, yields $62.25. The stock currently trades at $69.03.

Equinix Inc. (EQIX)

• Earnings 2.08
• Revenues 1.08B
• Growth 17.82%

And finally, we have Equinix which is the most hardware driven of the cloud computing stocks. I also think this is going to be a VERY competitive area within the cloud computing space as large players such as IBM, DELL and others, enter and compete in the space. Earnings of $2.08 with a growth at 17.82% and a PE growth premium of 1.5 yields $55.59. The stock currently trades at $102.

In summary:

• RAX: valuation $16.37, market price $21.95 -> 34% premium
• TMRK: valuation $7.56, market price $8.20 -> 8% premium
• TMRK: alternative valuation $10.15, market price $8.20 -> 19% discount
• GOOG: valuation $649, market price $587 -> 10% discount
• CRM: valuation $62.25, market price $69.03 -> 11% premium
• EQIX: valuation $55.59, market price $102 -> 85% premium

As we can see, the two stocks that trade at a discount to this valuation are the two with noticeable risks. TMRK currently has negative earnings and GOOG has the impact of withdrawing from China to contend with as well as it's shear size. It is much more difficult to maintain a 21% growth rate for a $20B revenue company that it is for $750M. Personally, I find the long term growth estimate for Google as suspect.

CRM, I find to be fully valued at the current price. EQIX, I actually find overvalued. While not a reason in itself to short, it is a reason for me not to buy this particular stock even with the secular winds to my back. Finally, this leaves RAX, which I think is an excellent pure play, has positive earnings, its long term growth rate is most sustainable and services the software side as much as the hardware. It does trade at a bit if a premium to valuation but less so relative to its peers in this group. RAX is one of those names I want to accumulate on a pullback.

1. Rackspace (RAX)
2. Terremark Worldwide (TMRK)
3. Google (GOOG)
4. Salesforce.com (CRM)
5. Equinix Inc. (EQIX)

Here's a couple news items out of China that are certainly making impacts on this side of the pacific. We certainly are seeing a trend when it comes to dealing with the central command economy that is China. "Free Trade" isn't quite "free" when dealing with a country that fixes it's currency and has strict domestic restrictions for businesses and markets.

Europe shares end lower on China move

• The world's third-largest economy took its strongest step towards tightening monetary policy, surprising investors with a rise in banks' required reserves by 50 basis points, making China one of the largest economies to start rolling back the emergency policies used to combat the crisis fallout.

Google threat a rare show of defiance in China

• China's growing consumer market is especially important to many companies at a time when global demand has plunged. The government is forecasting 8.3 percent economic growth for 2009 and China is on track to overtake Japan as the second-largest economy.
• China has the world's most-populous Internet market, with 338 million people online as of June, and foreign Internet companies eager for a share of that.
• But despite risking damage to their reputations by cooperating with the government, they have struggled to make headway against intense competition from Chinese rivals. Yahoo, eBay Inc. and others have given up and turned over control of their China operations to local partners. Google is the last global Internet company to manage its own China arm.

Events such as these continue to build support for the idea that a significant slowdown at least in the next couple of years is a definite possibility in China. The catalyst may be a build up of anti Chinese sentiment through protectionism. As China is such an export driven economy, trade barriers would have serious impacts on the country with far more capacity to produce products than domestic demand.