JNPR is up 26% year to date in 2021 – has it passed the point of useful value?

The Tech sector has been one of the top-performing areas of the market for the past year and a half, which isn’t too surprising given the way Technology enabled the corporate world to shift operational models to remote, work-from-home, and flexible working arrangements during the pandemic. Looking beyond the limits of the health crisis and into the future, the reality that some form of remote work will continue as a long-term, and in many cases, permanent working solutions for many businesses means that the relevance of the companies that provide remote and cloud-based business services isn’t going to go away.

As a bit of a contrarian, my preference is actually to look for stocks in any industry that aren’t getting as much attention right now. These are often companies that fit into operating segments that have ties to the “hot spots” everybody is paying attention to, but don’t completely fit into those generalized categories. These are many of the stocks that make up the broad watchlist I like to keep an eye on, and that I come back to every so often to check on their latest earnings statements and determine what I think their useful fundamental and value opportunity is. That’s a process that covers a lot of metrics, but for me it’s become an important way to refine the system I use to look for useful investing opportunities.

It’s a good thing to look at a bunch of fundamental, value, and technical metrics and indicators right now and to be able to use that information to make an educated decision about whether you want to work with a given stock; but when you can overlay an understanding of how those same metrics have shifted over time, you get a more comprehensive view of how a company is evolving over time. I find that it also makes it easier to frame those changes against the backdrop of broader market and economic activity, which only further improves the decision-making process.

This can be important, because it’s easy to fall into the trap of believing that because you’ve used a stock to nice effect in the past, it might be a good opportunity right now. Checking back every so often through those fundamental, value and technical metrics is a good way to minimize the subjectivity that naturally comes with familiarity and make sure that you’re looking at every stock you consider through the lens of careful, objective, and systematized analysis.

With that, we come to today’s stock highlight. Juniper Networks Inc. (JNPR) is a stock that I’ve followed for a number of years, and used off and on in my own investing systems to good advantage. JNPR has a foothold in the remote networking and cloud space as a provider of Wide Area Network (WAN) solutions, which is part of the tech ecosphere that virtual private networks (VPNs) generally fall under. JNPR is a company that doesn’t jump off the page, or off of the tongues of talking heads when they talk about tech companies, because they tend to be focused on glitzier, attention-grabbing names. Even so, JNPR occupies an interesting niche in its market, and its stock price over the past nine months has proven that out, with the stock following a strong upward trend from about $19.50 in November 2020 to a peak just last week at around $29 per share.

For a value-focused investor like me, seeing a stock at or near a 52-week high is usually an early sign to move on and look for something else. For stocks that I’ve followed in the past, though, sometimes it’s a good idea to go ahead and to run through my fundamental and value metrics to see if the company’s fundamentals are strong enough to justify the stock’s increase in price, or whether the upward trend has outpaced those fundamentals to the point that the reward: risk profile has been turned on its head. Where does JNPR sit in that respect today? Let’s find out.

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 $9.2 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased about 29%, while revenues increased by almost 8%. These numbers were even better in the last quarter, as earnings increased more than 106.5%, with sales increasing a little over 9%. The company’s margin profile shows that Net Income as a percentage of Revenues strengthened in the last quarter, from 4.49% over the last twelve months to 5.29% in the last quarter. That is a good sign that the company’s core profitability is improving.

Free Cash Flow: JNPR’s free cash flow declined steadily since the beginning of 2017, when it was almost $1.3 billion, to about $538.2 million at the beginning of 2020. Despite pressure driven by the pandemic, JNPR’s Free Cash Flow has remained relatively stable and healthy, even increasing to $581.5 million in the last quarter, marking a significant improvement from $421.3 million in the quarter prior. The current number translates to a Free Cash Flow Yield of about 6.3%.

Debt to Equity: A has a debt/equity ratio of .39. This is a conservative number. JNPR currently has a little over $1.32 billion in cash and liquid assets against a little under $1.7 billion in long-term debt. The company’s balance sheet indicates their operating profits are sufficient to service the debt they have, with very healthy liquidity that is more than adequate to make up for any potential operating shortfall.

Dividend: JNPR’s annual divided is $.80 per share, and has increased from $.76 in 2019; that translates to a yield of 2.82% 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 I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $22.50 per share. It should be noted this number was $23.50 per share in mid-2020, but dropped to about $21.75 in the early part of this year. The current number suggests the stock is overvalued, with -21% downside from its current price, with a useful discount price at around $18.

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 upward trend from November of last year at a low around $19.50 to its peak at the beginning of this month at around $29; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Immediate resistance is at the stock’s recent peak at around $29, with current support sitting at around $28 per share. A push above resistance should have short-term upside to between $30 and $31, based on the typical distance between support and resistance level during this stock’s upward trend. A drop below $28 could see limited downside, to only about $27 based on previous pivot activity as well as the strength of the upward trend. A drop below $27, however could see the stock fall to as low as $25.50, close to the 38.2% retracement line if bearish momentum starts to accelerate.

Near-term Keys: The stock’s current momentum is clearly bullish, making any kind of short-term bearish trade quite speculative, with limited profit potential right now; but if the stock does drop below $27, that could offer an interesting signal that the short-term trend is about to reverse to the downside. That could provide an opportunity to sell the stock or to buy put options, using a range between $26 to $25.50 as a near-term exit point. A push above $29 could be a signal to consider buying the stock or working with call options, with a near-term target between $30 and $31. As for JNPR’s value proposition, the company’s fundamentals are informative, but unfortunately haven’t kept up with the pace of the stock’s increase in price. Practically speaking, JNPR would need to drop to around $18 to provide a practical, realistic basis for a long-term, value-based investment.