EOT Trade Alert – June 10, 2011

| June 10, 2011

June 10, 2011

Trade Alert:

   Buy APKT August 2011 $60 Puts at $3.75 or better

Company Background:

Acme Packet (APKT) develops and provides technology to the communications industry.  Their products, called session border controllers (SBCs), are made from a mix of hardware and software.  They play a central role in unifying separate IP networks. Their products allow service providers to deliver secure and high-quality interactive communications over wire and wireless networks.

Short-Term Catalyst:

This high flying tech stock has flown too close to the sun.  And just like Icarus, this stock is about to fall.

APKT was a great growth story.  They grabbed a 50% share of the SBC market in no time.  And their sales and revenue soared.  In 2010, sales were up 64% and they’re expecting another 36% gain this year.

Not surprisingly, given APKT’s dominance of the growing SBC market, investors sent their stock skyrocketing.  In February of 2010, APKT was a $10 stock.  Today it trades for close to $70.  That’s a 600% gain in less than 18 months.

The problem is… They can’t maintain this level of dominance.

The SBC market is still young but it’s growing up fast.  Now it’s reached a point where the big boys in the communications industry are starting to take notice.

The large integrated equipment vendors like Cisco Systems (CSCO) and Juniper Networks (JNPR) are entering the market.  APKT is now in danger of losing market share and seeing their high profit margins decline.

What’s more, APKT’s valuation is hefty.  They have a PE of 98.8x, a forward PE of 46.1x, and a PEG of 4.13.  Those numbers look like something out of the tech bubble back in 2000…

Clearly, investors are expecting the amazing revenue and earnings growth to continue. I think APKT will come up short of expectations.  And when they do, it’s going to get ugly.

The combination of a slowing economy and increased competition are going to cause this high flying growth stock to fall back to earth.  Let’s buy put options now to profit from the coming sell off in APKT.

Trade Details:

Underlying Stock Symbol: APKT
Current Bid-Ask Price: $3.30 – $3.60
Option “Buy Up To” Price: $3.75
Break-Even On Stock At Expiration: $56.25
Maximum Risk Per Contract: $375

Exit Strategy:

APKT is trading at $68.28 per share.  Resistance levels will be at $80 and again at $85. Remember, we want this stock to move lower.  Support levels will be at $56 and $50. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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