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An Earnings Season Surprise

As for stock ideas, I’m going to go with VMware (VMW), a stock that frankly I had totally taken off my watch list many months ago. It was a good winner during much of the bull market, but after a mega-run, the stock basically topped out last fall (relative to the market) and has been consolidating ever since.

The story has always been solid: Server virtualization, which is hugely cost-effective because it allows each server to be used for many different applications. It doesn’t hurt that so-called “cloud computing” has become all the rage. But while growth was good, it wasn’t anything extraordinary (never triple-digit growth or something like that), and eventually the stock’s valuation got too big for its britches. Hence the long period of lagging action, even as the overall market ramped last fall and so far this year.

However, earnings season has a way of transforming the landscape for certain stocks, and for VMware, it appears to have done just that. Sales rose 33%, earnings jumped 50% and the firm raised 2011 guidance significantly. Analysts are now looking for the bottom line to jump 30% this year; knowing how VMware regularly beats expectations, that figure could prove conservative.

All those numbers are nice, but what caught my eye was the stock’s reaction: VMW surged 12% the day after its earnings report and, more importantly, volume that day totaled 13.6 million shares. That was more than five times normal and the stock’s largest one-day total since July 2008.

Interestingly, the stock surged right back to its old price highs, and has since backed off a few points, as many leading stocks consolidate their recent gains. I think it’s possible to buy a small position (maybe half of the amount you’d normally buy) around here, and look to average up on a strong breakout above 99. After a multi-month rest – before the earnings move, shares had gone nowhere for six and a half months – it looks as if VMW might be ready for another upleg.
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When Life Gives You Lemons
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