F-5 shares have continued to trend lower, although initially rebounding a week after the gap lower, and are now at $94.69. Shares have found some support at $90, similar to the October lows, and would need to break above $105 to move past downward trend resistance. The bearish momentum does appear to be waning with the ADX peaking at 43 in late March and now at 37, and MACD and RSI also showing signs of bullish divergence. Using Fibonacci Levels from the February 2010 lows, the $85 level is support and $107 is resistance. Bollinger Bands are very narrow, so a large reaction seems likely this time around as well. The volume on the moves lower has far outweighed the weak bounces in recent weeks, signs of Institutional selling. There is an unfilled gap from a July 2010 earnings gap higher from $79.40 to $77.75. April and May are two of the three best seasonal months for F-5 with 12.34% and 8.15% average returns the past 5 years.
Analysts are looking for $0.86 in EPS and $277.75M in Revenues for the Quarter and $3.60 in EPS and $1.15B in Revenues for FY11. For Q2 the expectation if for $0.89 in EPS and $290.59M in Revenues, a 26% growth year over year.
F-5 shares are now trading 43.25X trailing earnings, 21.9X forward earnings, 1.89 PEG, 7.97X sales and 23.3X cash flow, actually cheap compared to many of the other cloud computing stocks. Riverbed (RVBD) recently gave positive guidance that may be an indication that F-5 could deliver this time around.
JP Morgan recently lower estimates ahead of the quarter due to the impact from Japan. SunTrust recently initiated shares a Buy with a $126 target. Most firms have been lowering estimates into the quarter, so F-5 has a lower bar this time around, which could allow for some upside surprise.
F-5 has always been a big mover on earnings, before the 21.35% move lower, shares put in 14.67%, 14.07%, and 15.58% moves higher in 3 of the prior 5 quarters. F-5 trades weekly options, and the April IV of 97.33% compares to May at 54.3% and July at 48.7%. Options are implying a 10% move on earnings and the IV Skew is fairly flat which shows that OTM puts are not in high demand for protection into results. The options market has under-priced volatility the last 2 quarters, with being long the straddle paying off each time.
On April 5th a trader sold 1,000 October $95/$135 call spreads for a $10.70 net credit, bear call spreads. On April 13th a trader close 4,000 July $95/$90 put spreads, but sold to open 4,000 July $87.50 puts at $5.46.
UBS was out last week with its derivatives team recommending to sell F-5 puts into the quarter, seeing limited downside potential for shares.
With the April options "juiced" into earnings, one trade to look at would be the April/May $105/$85 Double Calendar Spread at $2.60, a profit range from roughly $80 to $115. This gives some wiggle room if the options market is once again under-pricing volatility, and also takes into account key technical support and resistance levels, also noting that upside potential is likely capped due to valuation.
A bearish biased trade with a great reward/risk profile would be the April $80/$85/$95 Butterfly Put Spread at $0.63.
Disclaimer: This is Not a Trade Recommendation, Just Kicking Around Some Ideas
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