Wednesday, October 06, 2010

What is EQIX Telling Us?

When I see a stock like EQIX get MASSACRED today on a relatively minor announcement, I take it as a warning sign.  Currently, EQIX is down more than 33% on this announcement:

"Equinix now expects third quarter revenues to be in the range of $328.0 to $330.0 million, the midpoint of which is 2.2 percent lower than the midpoint of its previous outlook, and total revenues for the full year to be approximately $1,215.0 million, which is 1.2 percent lower than the midpoint of its previous outlook. This updated guidance is due to underestimated churn assumptions in Equinix’s forecast models in North America, greater than expected discounting to secure longer term contract renewals and lower than expected revenues attributable to the Switch and Data business acquired in April 2010. 

For third quarter 2010, Equinix is increasing its adjusted EBITDA outlook to greater than $140.0 million. For the full year of 2010, the adjusted EBITDA outlook is also being increased to approximately $540.0 million. This increase in expectations is due in part to better than expected gross margins and lower than expected cash selling, general and administrative expenses."

What I take from this is that EQIX was priced to perfection.  Looking at the charts of some of the monster rallies we've seen lately (PCLN, OPEN, NFLX), I get the feeling EQIX isn't the only stock out there relying on a perfect storm of optimistic assumptions.

Barry Ritholtz today wrote an article called "Do You Want to Be Right? Or Do You Want to Make Money?" where one basic message was "don't fight the tape."  (What's "fighting the tape?"  Shorting NFLX, for example - that's fighting the tape.  You may think the stock is overpriced, but it's going higher whether you like it or not - for now at least.  It's a friggin freight train)  I agree with Barry's "don't fight the tape" advice and I hate to fight the tape - but the problem, as illustrated in today's EQIX action where the stock was brutally butchered off an announcement that certainly doesn't seem to warrant a 35% decline in the stock price,  is that once the tides turn, investors have little to no chance to take profits or reduce their positions!   

That leaves traders in a tough spot - sit on the sidelines and watch others happily gorge themselves at the profit buffet while hoping they'll be able to escape before the elevator comes to take the stock price down?   Or jump right in yourself, and hope that you'll be smart enough to jump off before everyone else tries to flee a burning building, so to speak?   It's not easy, either way.

There's an old quote:  "Stocks take the stairs up, and the elevator down."

I have no positions in any of the stocks mentioned.  



mrwiizrd said...

I have a feeling this may be the case with AAPL as well.

Bubblelicious baybee.

EconomicDisconnect said...

I will have some comments on Barry's item as well.

Market Savant said...

With stocks all trading so tightly together, managers have been chasing alpha in the "good company with rich valuation" stocks. The problem is when the multiples in the names are north of 30 or so, lots of room on the downside. Anybody investing on that kind of time frame and risk/reward parameters is foolhardy.