Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
As turmoil in emerging markets began to taint sentiment in developed markets, U.S. stocks recorded their worst week since June 2012, with the S&P 500 losing 2.6%. The narrower Dow Jones Industrial Average (^DJI -0.11%), meanwhile, fared even worse, falling 3.5% -- its worst weekly decline since November 2011. Nevertheless, some stocks managed to buck the trend on company-specific news. The top-three performing stocks in the S&P 500 were technology stocks, or technology-assimilated: Netflix (NFLX -3.92%), F5 Networks (FFIV 1.18%), and Juniper Networks (JNPR -1.45%).
Netflix -- the best-performing stock in the S&P 500 in 2013 -- rose 17% on the week, as investors were impressed with the fourth quarter results the company announced on Wednesday. None of this "beat-by-a-penny" business for the streaming video provider: In the fourth quarter, Netflix earned $0.79 per share, where Wall Street was expecting just $0.66. Better yet, the company beat its own guidance for contribution margin (a company measure of profitability that excludes technology and development, and general and administrative costs) and net additions of U.S. subscribers, with 2.25 million for the latter.
Incredibly, in spite of Netflix's roaring stock price, the shares are cheaper now, on the basis of their forward price-to-earnings multiple, than they have been in at least 15 months -- a testament to the extraordinary performance of the underlying business. Still, with the shares at 92 times the next 12 months' earnings-per-share estimate, an old value hound like me would be hard-pressed to describe them as "cheap." I think Netflix is a terrific business (full disclosure: I'm a very satisfied customer), but it's hard for me to wrap my head around the valuation. As such, I will repeat what I have written before: I believe the stock is appropriate only for genuine long-term investors (i.e., with a multi-year holding period) with a healthy tolerance for volatility.
F5 Networks' stock was up 8.2% this week after the company announced better-than-expected fiscal first-quarter results. Adjusted earnings per share of $1.22 came in above the guidance range of $1.17 to $1.20 that management had provided in October. Crucially, F5 provided guidance for the current quarter ending March 31 of adjusted earnings per share of $1.23 to $1.26 on revenue of $408 million to $418 million, which exceeded analysts' forecasts of $1.21 and $404 million, respectively. (Wall Street has since raised its estimates.)
Juniper Networks (JNPR -1.45%) was the third-best performing stock in the S&P 500 this week, with a 6.6% gain, and, coincidentally, it was also the third–best performer the previous week. Last week, the catalyst for the share price increase was Elliott Management, an activist hedge fund that disclosed a 6.2% ownership stake and proposed "value creation initiatives." In its presentation, Elliott Management's Perspectives, it suggests that a $200 million reduction in operating expenses and a $3.5 billion share repurchase program could lift the stock price to $35 to $40.
This week, another activist hedge fund, Jana Partners, piled on, telling its investors in a letter that it has become one of Juniper's largest shareholders and advocating similar actions as those outlined by Elliott Management. Meanwhile, Juniper's fourth-quarter results, released on Thursday morning are just a footnote, even though the company beat estimates for earnings per share and revenue. That won't satisfy Elliott or Jana, with the latter calling for a greater "sense of urgency" from CEO Shaygan Kheradpir.
Having started on Jan. 1, Kheradpir has his work cut out for him. The company certainly doesn't appear to be ignoring the hedge funds -- in response to Juniper's statement, a company spokesman said (my emphasis) that "the board and management team have been comprehensively analyzing the company's priorities for some time, and we are finalizing our review with a sense of urgency."
