Just as trade tensions seemed to escalating beyond any hope of near-term recovery, the Trump administration as well as Chinese officials both have seemed to shift the conversation. It certainly doesn’t mean that newly introduced tariffs from China, and an increase in existing and planned duties from the U.S. won’t happen, but it does seem to be a useful step back from last week’s seemingly inflammatory news that included $75 billion in new tariffs from China and Trump publicly calling the Chinese president an “enemy.”
Amid a standoff that has lasted for more than a year, I think most investors and economists are hungry for progress – any kind of progress – that can ultimately lead to trade peace between the U.S. and one of its most important trading partners. That doesn’t mean that the worst isn’t ahead, but it does suggest that the sky may not be falling just yet. I do expect, however that the market will remain volatile for the time being, with plenty of uncertainty ahead. That means that we’re not out of the woods just yet, and it’s still a good idea to be cautious and very selective about taking on new trades. I think that it also means that the hunt for great value is going to get more interesting; a smart value investor should be building a watchlist of interesting stocks to keep track of, and identify the price levels at which you think the opportunity is just too good to pass up.
Putting together a good watchlist can mean a lot of different things, depending on what your investment preferences are, the kinds of stocks that you find to be the most interesting, and how much time you want to spend tracking a basket of stocks on a daily basis. Personally, I like to try to keep a fairly broad mix of stocks across as many sectors as I can, so that I can increase my chances of finding useful trades no matter what the overall market may be doing. Despite that intent to be as diversified in my analysis as I can, I find myself also gravitating naturally to a few industries in particular. The tech sector is one such segment, because some of my professional background includes a significant amount of time working in information technology and networking.
The market’s treatment of the sector has meant that a lot of the stocks I’ve kept track of are pretty beat up right now, which isn’t great news for the tech stocks I currently hold, but also opens the door to what I think are going to be some pretty interesting opportunities in the months ahead. So I’m keeping a lot of notes about some of those stocks, including where I think the value story becomes really compelling.
Juniper Networks (JNPR) is an example of the kind of stock talking about; they’re a solid, mid-cap player in the telecommunications and networking industry that has offered some useful investing opportunities for my investing method in the past. I’m not sure their price offers the kind of bargain I’m looking for just yet, but the stock is down nearly -19% since November of last year that included a new multiyear low earlier this week.
Fundamental and Value Profile
Juniper Networks, Inc. designs, develops and sells products and services for high-performance networks to enable customers to build networks for their businesses. The Company sells its products in over 100 countries in three geographic regions: Americas; Europe, the Middle East and Africa, and Asia Pacific. The Company sells its high-performance network products and service offerings across routing, switching and security. Its products address network requirements for global service providers, cloud providers, national governments, research and public sector organizations, and other enterprises. The Company offers its customers various services, including technical support, professional services, education and training programs. The Company’s Junos Platform enables its customers to expand network software into the application space, and deploy software clients to control delivery. The Junos Platform includes a range of products, such as Junos Operating System (OS) and Junos Space. JNPR has a current market cap of about $8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined about -20.5%, while revenues decreased almost -8.5%. These numbers improved in the last quarter, as earnings increased nearly 59%, while sales rose about 10%. The company’s margin profile shows that Net Income as a percentage of Revenues have declined, from 11% over the last twelve months to 4.19% in the last quarter.
Free Cash Flow: JNPR’s free cash flow has declined over the past year from about $700 million, but remains adequate at $400 million; that number translates to a Free Cash Flow Yield of about 6.7%.
Debt to Equity: A has a debt/equity ratio of .32. This is a conservative number. JNPR currently has a little over $2.8 billion in cash and liquid assets against only $1.49 billion in long-term debt. The company’s balance sheet indicates their operating profits are sufficient to service the debt they have, even as Net Income has deteriorated; that said, their very strong liquidity is more than adequate to make up for any current shortfall.
Dividend: JNPR’s annual divided is $.76 per share; that translates to a yield of 3.28% 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 JNPR is $13.28 per share, and which translates to a Price/Book ratio of 1.74 at the stock’s current price. Their historical average Price/Book ratio is 2.03, suggesting suggests the stock is currently trading at a discount of about 16.5%. The stock’s Price/Cash Flow ratio however, suggests the stock is somewhat over-valued, by about -3.6%. On a Price/Book basis, the stock would need to drop just below $22 per share to start offering a really attractive value proposition, while the Price/Cash Flow ratio puts a lower value target around $17.50 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend from November of last year to its recent bottom at around $22.50 per share; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. JNPR’s bearish momentum has really picked up since the beginning of August as the stock dropped from $27 to its current level. While it does appear to moving a bit higher off of support at that low, the size and pace of the decline over the last few weeks does make any kind of significant rebound difficult to forecast in the near term. The stock would really need to break the resistance that current sits around the 382.% Fibonacci retracement line, between $25 and $25.50 per share. If the stock can break above that level, it should have room to challenge its next resistance at around $27.50, where the 61.8% retracement line sits. If, however the stock’s bearish momentum prevails and pushes the stock below $22.50, its next most likely support level is somewhere between $20 and $21 based on pivot levels last seen in mid-2016.
Near-term Keys: While I think the stock is unlikely to reverse its short-term downward trend right now, a move above $25.50 could offer an interesting opportunity to buy the stock or work with call options with a short-term target price around $27.50 per share. I believe, however that the better, higher probability short-term opportunity is likely to come on the bearish side, with a break below $22.50 offering an opportunity to short the stock or buy put options with an eye on the $20 range as an exit target. If the stock does start to test those historical lows, the valuation story is going to get a lot more interesting, however, and that could be the point where a good long-term opportunity will be available to buy this good stock at a nice price.