One of the elements that I’ve come to rely on as a value investor to identify good bargains in the stock market is to look for fundamentally strong stocks that are trading at the lower end of their historical ranges. That’s a technical addition to the value-oriented investing system I’ve built over years of study and hard-won experience.
Another analytical tool that I like to use is sector rotation. That involves comparing the technical patterns over time of the different sectors of the market against each other to find industries that are in or out of favor with institutional investors. Out of favor sectors will have a larger number of stocks trading at those historical lows that I like to see, and since the natural ebb and flow of market sentiment means that at some point, an out of favor sector will come back into favor, looking for that sector-based turn can point you to good timing opportunities for opening those value-based positions.
If I work from a sector rotational view right now, Technology stocks aren’t a place my value-based approach will naturally take me. The sector is up more than 27% year to date, with a number of stocks in the sector setting new all-time highs. The Software industry, which is a subset of the Tech sector, has also been very strong, and is up a little over 30% year to date as measured by the S&P 500 Software and Services SPDR ETF (XSW). That’s great news for growth investors, but less encouraging for my investing style.
In spite of the both the sector and the industry’s strong performance this year, Citrix Systems Inc. (CTXS) has widely underperformed. The stock is down about -3% so far this year, and a little over 15% since hitting a high at nearly $117 in July of last year. That long-term downward trend is the primary reason the stock came to my attention this week, and the fact that I like their fundamental profile means that the stock might be something to watch. Does the stock’s decline also translate to a good value right now? I’m not so convinced. Let’s take a look.
Fundamental and Value Profile
Citrix Systems, Inc. offers Enterprise and Service Provider products, which include Workspace Services solutions and Delivery Networking products. The Company’s Enterprise and Service Provider products include Cloud Services solutions, and related license updates and maintenance, support and professional services. The Company’s NetScaler nCore Technology is an architecture that enables execution of multiple packet engines in parallel. The Company’s workspace services include Application Virtualization and virtual desktop infrastructure (VDI), Enterprise Mobility Management and Citrix Workspace Suite. The Company’s NetScaler ADC is a software-defined application delivery controller (ADC) and load balancer. The Company’s Cloud Services include ShareFile and Citrix Cloud. It provides various ways for customers to receive upgrades, support and maintenance for products, which include Software Maintenance, Subscription Advantage, Technical Support Services and Hardware Maintenance. CTXS’s current market cap is $13.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -17.5% while revenue increased a little over 3%. Those numbers both turned more negative in the last quarter; earnings decreased more than -29% while sales were -10%. Despite these negative patterns, the company has a healthy margin profile, with Net Income that was 18% of Revenues in the last year. That did decline a bit to 15.3% in the most recent quarter, but remains healthy.
Free Cash Flow: CTXS’s free cash flow is healthy, at $874.42 million. This number translates to a Free Cash Flow Yield of 6.58%.
Debt to Equity: CTXS has a debt/equity ratio of 1.34, which is a bit high, but curiously misleading by itself. The company’s balance sheet shows more than $1.7 billion in cash and liquid assets in the last quarter versus $742.1 million in long-term debt. Despite the high ratio, the company’s margin profile and balance sheet both show more than adequate liquidity to service debt and maintain excellent financial flexibility to take advantage of new opportunities as they become available.
Dividend: CTXS pays an annual dividend of $1.40 per share, which translates to a yield of about 1.4% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CTXS is $4.20 and translates to a Price/Book ratio of 23.63 at the stock’s current price. That is a very high ratio that is more than 63% above the stock’s historical average Price/Book ratio; the stock is also about 14.5% above the stock’s historical Price/Cash Flow ratio. Tech stocks traditionally trade at high valuation multiples, including both of my favorite measurements; but even when you compare CTXS’ numbers to industry averages, I think it’s hard to paint the stock as any kind of bargain right now.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend from July 2018 to right now; it also provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock has been hovering at the bottom of its trend since March, with support in the $99 area and close to the stock’s current price, and resistance a little above $102 per share. That range is forcing the long-term trend line to start flattening, which could be an early indicator of a reversal of that trend. The stock would need to break above $102 per share to give an actionable bullish signal, while a push below $99 would confirm the strength of the downward trend.
Near-term Keys: The truth is that the stock’s downward trend, while it has pushed the stock to interesting lows relative to its yearly extremes, doesn’t make the stock a good value right now. The stock would need to drop to around $65 to be considered any kind of legitimate value, which means that the best opportunities to work with this stock will be based on short-term trading methods like swing trading. A break above $102 could be a good bullish signal to buy the stock or work with call options with a target at the stock’s next resistance at around $104.50 where the 38.2% Fibonacci retracement line sits. If the stock drops below $99, it has room to drop to about $94.50 before it finds new support. That could be a useful signal to short the stock or consider buying put options.