Earnings worries (Cognex, Arista & Applied Opto)

Guys

Without wanting to try and call top of the market or feed any FUD into the equation, I wanted to get other people’s take on a few concerns I have about the potential for either a miss against guidance or expectations with a number of holdings we might have in common.

For different reasons, I’m worried about these 3 stocks - partly because of the valuations they have reached and partly because of fundamental challenges they may face this quarter.

Cognex:-

This seems priced to perfection and beyond. I worry it can keep the earnings momentum going but what I am really worried about is the likelihood of reaching expectations. I checked on Yahoo and when I saw earnings expectations calling for a 86% uplift from last quarter I just fail to see how their performance track record can match this…

http://www.investors.com/research/ibd-stock-analysis/q3-earn…
https://sg.finance.yahoo.com/quote/CGNX/analysts?p=CGNX

Arista Network:-

Ok this one I wasn’t worried about until I woke up this morning and read that literally this last quarter saw the introduction of the Cisco import ban. How can they possibly keep earnings going and manage a beat and raise when there’s this kind of road block to their core business?

http://marketrealist.com/2017/10/whats-arista-doing-about-th…

Applied Optoelectronics:-

Whilst also sharing a high earnings expectation, Applied Opto is also facing a challenge from a key customer defecting as it shifts purchasing from 40G too 100G
https://seekingalpha.com/news/3299075-applied-opto-minus-4_7…

Other valuations and earnings reports that are keeping me up at night are Neogen and Abiomed.

Anyone else have similar bouts of nervousness or anything comforting to share?

Cheers
Ant

6 Likes

Ant,

I only follow Arista out of the stocks you mentioned. The company has shown the capability to navigate the patent issues well in the past and have commented on them significantly in the calls. They can utilize domestic manufacturing to circumvent the import ban at the expense of near term margins.

Sales skyrocketed last quarter. The company is capitalizing on the transition to 100Gb and preparing for 400Gb in the longer term. They are performing well in all of their verticals. I don’t have any insight as to what the next earnings report will bring. But also wouldn’t feel confident enough to get out of and then back in the stock at the right time. If the near term margins took a hit through more domestic sourcing and the stock dove enough, I’d likely view it as a buying opportunity.

Just my thoughts and feel free to comment or let me know if you disagree.

Thanks,
A.J.

2 Likes

Not that I have any greater insight than A.J. But I concur with his assessment.

I am not concerned. If they miss because of import ban, then I will buy a lot more, a heck of a lot more.

I have been trying to get the point across that every time a stock falls does not necessarily create a buying opportunity. It does seem to in a very good market, but most of the time it is not so. But we are in such a market now. And you gotta love it!

This said, if it is the import ban, or somewhat decreased gross margins that cause an issue, I will buy much more based solely on fundamentals. Absent some huge change in this market and competition superficial issues like this are mostly irrelevant.

I will certainly comment again after earnings if it is so to determine the issues. It will not cause me to sell absent some wholesale change in real fundamentals. The import ban is not such a thing for ANET.

Tinker

1 Like

Tinker, did you recently add ANET to go with your 2 positions of SHOP and NVDA, or am I mis-remembering who it was that had those as their only 2 holdings (mentioning repeatedly that such concentration is not recommended for anyone else)?

That be me.

Tinker

But is the outstanding Cisco litigation really a ‘competition superficial issue’ Tinker?

Because I have not got the ability to quantify its effect on Arista, nor have read any such breakdown, this known-unknown is certainly tempering the size of my investment.

Is there a wonk at TMF who could lay out a few lines of guesstimate, of the size of the hit to ANET’s business if the remaining/outstanding CSCO litigation was 100% successful?

Anyone else have similar bouts of nervousness or anything comforting to share?

Ant

When asked how he made his fortune, Bernard Baruch replied: “I made my money by selling too soon.”

https://www.goodreads.com/quotes/227381-i-made-my-money-by-s…

I would not advise going to cash which implies market timing but instead to rotate to less perfectly priced stocks. I used to subscribe to Louis Navellier’s MPT Review which was a very successful investing letter. One of his main screens was looking for earnings surprises. From your description it sounds like the stocks you are worrying about might have negative surprises.

BREAKING DOWN ‘Earnings Surprise’

Earnings surprises can have a huge impact on a company’s stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stock’s price, but also to a gradual increase over time. Hence, it’s not surprising that some companies are known for routinely beating earning projections. A negative earnings surprise will usually result in a decline in share price.

Read more: Earnings Surprise http://www.investopedia.com/terms/e/earningssurprise.asp

Denny Schlesinger

Is there a wonk at TMF who could lay out a few lines of guesstimate, of the size of the hit to ANET’s business if the remaining/outstanding CSCO litigation was 100% successful?

That is certainly not me! What I have experienced is that when a stock’s future is in the hands of lawyers the outcomes are less predictable but they can be hugely rewarding as was the case with tobacco. The lawsuits depress the price and if the company has deep pockets, defends vigorously, and wins, the bounty is huge. On the other hand, if it loses like breast implants and asbestos the outcome can be bankruptcy. I bought Merck on the VIOXX* recall of September, 2004 in the belief that Merck would be successful in the litigation. They defended vigorously. I sold three years later in November 2007 for a CAGR of 22%. Match the dates to the chart:

http://invest.kleinnet.com/bmw1/stats20/MRK.html

But Merck was down, not up like Arista! Unless you have confidence in the outcome it’s best to stay away, to hold less risky situations.

Denny Schlesinger

  • I was taking VIOXX at the time recommended by a very trusted doctor. The recall was voluntary showing good will.

Hi Ant,

My simplistic understanding of the situation is that the Patent Office has said the two Cisco patents are invalid. Another branch of the government under the Commerce Dept or something, has said “We’re not lifting the import ban until the absolute final determination by the courts” (or something like that). So Arista has to use domestic production (which it has lined up and was using for a while until the Patent Office made its determination) for those products that come under that ban. [Note that it’s not a ban on Arista selling the products. It’s a ban on importing the products. If they make them in the US there’s no problem at present.]

So I’d agree with everyone else, that the chance of Cisco putting Arista out of business is essentially nil, and the chances of them seriously damaging Arista’s business is now approaching those levels. I wouldn’t have said that a couple of years ago, which is why I was hesitant to take a position back then.

I hope to be corrected if anything I said was incorrect.

Saul

PS - Arista is followed by a lot, a lot, of analysts. The reactions to the recent developments in the Cisco suit have been a collective yawn, which tells me that they don’t think Cisco is much of a threat any more either. (But they may not be any more knowledgeable than I am).

2 Likes

re Cognex quarter to quarter is not useful if there is a strong seasonal component And I believe the IBD link does not say whether it is Y over Y or Q over Q. Likely it is the former.

Is there a wonk at TMF who could…

Strelna, you appear to be a subscriber to Stock Advisor. If you want to hear from TMF, see if anything is being said on that service’s ANET board? (And on the one for Rule Breakers if you are there too.)

I have noted that earnings surprises can result in nearly overnight appreciation in price, too quickly to profit much. Or it can be a lot slower, taking weeks to play out, giving you plenty of time to buy in. Generally the price change on good news takes place more slowly than the price change on bad news.
So how to determine which it will be? I suspect the more complex the news the slower the reaction, people need analysts to tell them what it means. They can figure out a factory fire themselves.

This is one of the times where I wish I had AI to figure it out.

This is one of the times where I wish I had AI to figure it out.

Navellier had some secret sauce to figure it out ahead of time but he was very secretive of the details.

Denny Schlesinger

Good point RHinCT, thank you! I had got used to reading comments about ANET here.