Extreme Chutes and Ladders

The Russell 2000 and correlated iShares Russell 2000 ETF (NYSE – IWM) are both on almost a two week slide that started the day after Thanksgiving.  The index is down about 2% and the ETF is down about 3%.  Is this a sign of a longer term slide and has the small cap sector run its course, or is this just a minor correction in a bull market?  We think the latter, as the technical analysis and valuation both indicate that the bull market is here to stay for a while.  What is more than likely occurring is some short term profit taking on  some great gains for the year.

There are still some ladders out there.  Extreme Networks, Inc. (NASDAQ – EXTR - $6.78) is a network infrastructure equipment service provider for business and enterprise  data centers and service providers that has had some great deal action and introduction of new products recently.  In mid November the Company announced a deal with Silicon Graphics International Corporation (NASDAQ – SGI) to provide network Hadoop solutions globally that work with Big Data, an industry that is expected to reach $24 billion by 2016, according to research firm IDC.   On the product side Extreme Networks launched the Summit® X770, a highly scalable Top of Rack (TOR) switch that offers the industry's highest port density of 10GbE and advanced scalability, programmability and robust software features addressing Big Data and the cloud.

The market has not changed and neither has our three-point checklist.  The technical analysis is bullish in the short and intermediate term, and very bullish long term for the Daily Moving Average metric.  The company has become profitable related to EPS and this has set the forward 12-month P/E to a very low 9.  Additionally, FY15 revenue is expected to jump 20% from FY14.  Finally, the smart money has begun to accumulate EXTR as the stock has risen 68% on nearly 2 million shares traded per day over the last three months.

We think there is more room to climb the ladder over the next month or two.  We think EXTR gets to $8 by the start of 2Q14.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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