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How I Bought Rackspace

Rackspace Hosting (NYSE: RAX  ) reported fourth-quarter results last week. The cloud computing pioneer delivered sales in line with Wall Street targets but $0.21 of earnings per share fell $0.01 short of analyst expectations. But that's not the worst of it. Rackspace didn't offer any top- or bottom-line guidance for 2013, and capital expenses are supposed to shrink a bit.

The next day, Rackspace shares were suddenly 18% cheaper. I found myself drooling over the unexpected buy-in opportunity, and vowed to report back if I ended up buying shares.

And that's why I'm here today. I started my Rackspace position as soon as our Foollish trading and disclosure guidelines would allow me to touch the stock again, and then I had to wait a while before mentioning the ticker again. That's how we roll over here, in order to avoid even the illusion of pumping and dumping or other inappropriately self-serving schemes.

By the time I picked up my shares, prices had fallen by another 5%. If you're still on the fence, Rackspace has now dropped a total of 8% from last Tuesday's closing prices -- or 26% from the near 52-week highs seen just before that game-changing earnings report. These are prices not seen since August of 2012.

Truth be told, I've been searching for an entry point to Rackspace for years. The stock price has more than quintupled over the last five years (yes, even including last week's drastic plunge!). The strong trends in sales growth and exploding earnings have always supported the stock, but you know how it goes.

RAX Chart

RAX data by YCharts.

How can you justify sinking real money into a stock with triple-digit price-to-earnings valuations? It's only human if your trigger finger hesitates under these conditions. And so I kept missing one brief buy-in window after another, always foiled by another impressive earnings report and skyrocketing share prices.

All of that is in the past now. I've got my stake, and you can join me at an even better discount today. If nothing else, you should add Rackspace to your Foolish watchlist so you can take action the next time Rackspace has some market-moving news to share.

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9/23/2016 4:01 PM
RAX $31.56 Down -0.15 -0.47%
Rackspace Hosting CAPS Rating: ***