Where Will EMC Go Next?

With shares of EMC (NYSE:EMC) trading around $22, is EMC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

EMC develops, delivers and supports the information technology industry’s range of information infrastructure and virtual infrastructure technologies, solutions and services. The company manages its business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure. Through its categories, EMC provides a foundation for organizations to store, manage, protect, analyze and secure information, improve business agility, lower cost of ownership and enhance their competitive advantage. As businesses continue to expand and look for ways to use technology for their benefit, companies like EMC will continue to see rising profits by delivering these essential products and services.

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T = Technicals on the Stock Chart are Weak

EMC stock has seen a consistent uptrend over the last several years. Currently, the stock is struggling to trade above a key $25 to $30 area. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, EMC is trading below its declining key averages which signal neutral to bearish price action in the near-term.

EMC

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of EMC options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

EMC Options

26.51%

40%

39%

What does this mean? This means that investors or traders are buying a normal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a normal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on EMC’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for EMC look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-3.70%

3.64%

3.7%

20.83%

Revenue Growth (Y-O-Y)

5.75%

8.17%

5.98%

9.62%

Earnings Reaction

0.71%

-4.04%

-0.89%

2.17%

EMC has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been mixed with EMC’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

How has EMC stock done relative to its peers, Hewlett-Packard (NYSE:HPQ), International Business Machines (NYSE:IBM), NetApp (NASDAQ:NTAP), and sector?

EMC

HP

IBM

NetApp

Sector

Year-to-Date Return

-11.54%

43.86%

5.11%

3.55%

4.07%

EMC has been a trailed by a wide margin, year-to-date.

Conclusion

EMC provides essential and innovative technology products to industry participants around the world. The stock has done reasonably well over the last several years but is currently seeing increased selling. Earnings and revenue figures have been steadily increasing but investors have been expecting more from the company. Relative to its peers and sector, EMC has done extremely poorly in year-to-date performance. STAY AWAY from EMC stock for now.

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