Each week, I report the results of the Big Idea Portfolio, a collection of five tech stocks that I believe will crush the market over a three-year period. I've done it before -- my last tussle with Mr. Market ended with me beating the index's average return by 13.35%.
Real money was on the line then, just as it is now, which means any one of the five stocks you see below could cause me a lot of public embarrassment. Last week, Riverbed Technology (RVBD +0.00%) did the most damage, falling more than 20% at one point on two analyst downgrades.
Apple (AAPL 0.96%) also fell another 7% on concerns over management changes: iOS chief Scott Forstall and retail lead John Browett are both leaving the company, though Forstall isn't leaving by choice. Rather, he's the apparent scapegoat for Apple's missteps with Maps.
But let's focus on Riverbed. Analysts and investors appear concerned about the company's $1 billion acquisition of OPNET Technologies (NASDAQ: OPNT). Analysts see the deal costing too much and introducing execution risk at a time of a macroeconomic weakness.
They're right, sort of. Riverbed is paying a premium for OPNET. But it's also a premium the company can afford. Riverbed boasts more than a half billion in cash and no debt, which should allow management to secure $500 million more in new financing on superior terms.
Let's also remember what management is aiming to build in acquiring OPNET. CEO and co-founder Jerry Kennelly said the deal gives Riverbed a needed edge in serving clients that need the ability to both monitor and tune the performance of data delivery over geographically diverse networks.
Before OPNET, monitoring had only been a small part of what Riverbed offered. Adding product diversity should be a meaningful long-term catalyst for the business and the stock.
What's the Big Idea this week?
After a few weeks of mostly outpacing the index, Mr. Market used Riverbed's plunge to take back 2 percentage points from last week's tally. The S&P 500, up 0.16%, and Russell 2000, up 0.14%, rose in a Sandy-shortened trading week. Both the Dow and Nasdaq ended lower, off 0.11% and 0.19%, respectively, according to data supplied by The Wall Street Journal. Here's a closer look at where I stood through Friday's close:
|
Company |
Starting Price* |
Recent Price |
Total Return |
|---|---|---|---|
|
Apple |
$420.59** |
$576.80 |
37.1% |
|
Google (GOOG 0.75%) |
$650.09 |
$687.92 |
5.8% |
|
Rackspace Hosting (RAX +0.00%) |
$41.65 |
$66.52 |
59.7% |
|
Riverbed Technology |
$25.95 |
$18.90 |
(27.2%) |
|
salesforce.com (CRM +0.34%) |
$100.93 |
$146.60 |
45.2% |
|
AVERAGE RETURN |
-- |
-- |
24.12% |
|
S&P 500 SPDR |
$125.83** |
$141.56 |
12.50% |
|
DIFFERENCE |
-- |
-- |
11.62 |
Source: Yahoo! Finance. *Tracking began at market close on Jan. 6, 2012. **Adjusted for dividends and other returns of capital.
Notable newsmakers
Among the other stocks in the portfolio, Rackspace, which reports third-quarter earnings tomorrow, rallied back after Superstorm Sandy took out cell towers yet failed to disrupt Rackspace's business. Amazon.com's (AMZN 2.61%) Web Services, which had been the subject of criticism, also held firm.
Wall Street is expecting Rackspace to report $335.9 million in revenue, a 27% increase year-over-year, and $0.19 in adjusted earnings per share. The website hosting specialist has come in on target in two of the last four quarters, recording a beat in the December 2011 quarter and a slight miss in March.
Netflix (NFLX 0.10%) also made news when activist investor Carl Icahn said in an SEC filing that he'd acquired a 9.98% interest in the business via a combination of stock and options. He's since teased the idea of a sale of the company. CEO Reed Hastings and the board responded by putting in place a "poison pill" that would make it harder for any would-be suitor to enact a hostile takeover of the company. Despite this, shares of Netflix are still trading more than 10% higher than they were before Icahn told the world he thought the business was "undervalued."
Yet all eyes remain on Apple. Just today, the Mac maker announced it had sold 3 million iPad Mini and fourth-generation iPad models over the weekend. That's a good total, but does it signal the sort of record-breaking quarter suggested by Apple's outsized component commitments?
