Bears move in to box, modem maker

Technology investors typically want to see growth, and can look to punish stocks that fail to deliver.

That’s what happened in Arris (NASDAQ: ARRS) on February 22: Earnings and revenue both beat analysts’ estimates, but management’s outlook for the current quarter lagged consensus by a wide margin.1 Its shares cratered 14 percent the next day, and they’ve barely moved since.

Company executives meet with investors in New York today (starting at 8 a.m. ET), and it seems traders are bracing for the other shoe to drop. A large option transaction was detected on Wednesday, roughly 11,000 April 25 puts bought for $0.65. Those contracts fix the price where ARRS can be sold, letting holders profit from a decline. For instance, a 7 percent drop to $23.70 will double their value, while a 10 percent decline will return 200 percent. (If they hold their ground or bounce, the puts will become worthless.)

ARRS produces telecommunications equipment like set-top boxes and modems -- not exactly the sexy products favored by technology investors these days. Sector heavyweight Apple (NASDAQ: AAPL), for instance, has run to new highs as customers upgrade iPhones and investors look for new service offerings to drive growth. Semiconductor stocks like Nvidia (NASDAQ: NVDA) and Micron Technology (NASDAQ: MU) have the best chip market in seven years.2 Even traditional PC and mainframe stalwarts like HP (NYSE: HPQ) and Oracle (NASDAQ: ORCL) saw green shoots of new growth in their last reports.

Arris (ARRS) 6-month chart

Source: OptionsHouse by E*TRADE

ARRS slid 0.93 percent to $25.57 yesterday. Some technical analysts may see bearish patterns after last month’s drop left the stock well below its 200-day moving average. Chartists often view that as a signal of longer-term direction. They may also expect more weakness given that the shorter-term 50-day moving average could potentially move below the 200-day, which would result in a so-called “death cross”. 

Puts outnumbered calls by a bearish 33-to-1 ratio in the session, with overall option volume more than 10 times the historical average in the last month.

1. Barrons: Arris Plummets 14% on M&A, 'Shocking' Outlook; Raymond James Defends. 2/23/17.

2. Semiconductor Industry Association: January Semiconductor Sales Up 14 Percent Compared to Last Year. 3/6/17