Stock Quotes in this Article: AKAM, ALU, ARUN, FFIV, FNSR, JDSU, LLNW, RVBD

WINDERMERE, Fla. (Stockpickr) -- Just when everyone thought that the networking sector was left for dead, Riverbed Technology (RVBD) threw the market a curve ball following the closing bell on Tuesday.

The San Francisco-based IT performance company for networks, applications and storage raised its first-quarter outlook to 19 cents to 20 cents a share on revenue of $163 million to $164 million. This wasn’t a monster raise by Riverbed, but it was notably above the average Wall Street analyst estimate for earnings of 18 cents a share on revenue of $161 million.

Prior to this news, the stock was in a nasty medium-term downtrend that saw shares fall from $44.70 to a close of $30.92 on Tuesday. Shares popped big on Wednesday, rising over 10% on huge volume. Over 18 million shares traded hands, which is well above the three-month average trading volume of around 5 million shares. Traders should now let this stock consolidate some of those gains and look to buy RVBD on any meaningful pullback. Keep in mind that the current short interest as a percentage of the float for RVBD is 5.8%.

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    Another heavily shorted name in the space that could be setting up for more gains is Aruba Networks (ARUN), which also popped big on Wednesday, rising by over 7%. I highly doubt that’s the end of the gains for ARUN. I would also look to add this stock on any weakness. The current short interest as a percentage of the float for ARUN is a rather large 12.1%.

    This bullish news out of Riverbed Technology, combined with the possibility of continued sector rotation out of commodities and into tech, could set up some networking and cloud computing stocks for big gains ahead. Many of these names have been beaten down in the past couple of months, and some are heavily shorted. I expect to see momentum-driven hedge funds jump into the group as they anticipate better results piggybacking Riverbed’s.

    Here’s a look at a number of beaten-down cloud and networking stocks that could be ripe to trade much higher from current levels.

    Akamai Technologies

    My first beaten-down tech name that could have a ton of upside from current levels is Akamai Technologies (AKAM). Akamai isn’t a typical networking or cloud computing play, but the company fits nicely into the Internet ecosystem. The stock has been absolutely crushed in the past couple of months, dropping from a recent high of $52.72 to its current price of around $37 a share. So far in 2011, the stock has dropped over 20%.

    Akamai provides services for accelerating and improving the delivery of content and applications over the Internet; ranging from live and on-demand streaming video capabilities to conventional content on Web sites to tools that help people transact business and reach out to new and existing customers. The company has a market cap of $7 billion and trades at a forward price-to-earnings ratio of 20.94. Akamai has a pristine balance sheet, with over $606.60 million in cash on the books with zero debt.

    Increased network usage and the growth of cloud computing applications should benefit Akamai in a big way. If Riverbed’s results mean that the sector is starting to see a pickup in growth again, then Akamai will reap big rewards as bandwidth usage expands. More bandwidth and application usage will mean that companies need to manage their Internet traffic better. This is where Akamai will come in. The company has also been making smart moves of late -- positioning itself for large enterprise growth -- through a new partnership with IBM (IBM) to accelerate applications across the Web, from the cloud to the enterprise.

    Market players are being handed a gift here with shares of Akamai since the stock has been beaten-down so hard in 2011. You can buy the stock now and use a mental stop just below some near-term support of $36.17 a share. I would add heavily to any long positions if the stock trades above some past resistance at around $39.30, and then I would add again if it trades above some more resistance at $40.70.

    Akamai, one of the worst-performing S&P 500 stocks of 2011, shows up on a recent list of 40 Stocks Analysts Are Insanely Bullish About.

    Limelight Networks

    If you’re looking for a cheaper speculative way to play what could be a coming boom for Internet traffic managers, then take a look at Limelight Networks (LLNW), a provider of content delivery network services. The company delivers content for traditional and emerging media companies or content providers. This stock is actually up year-to-date by around 22%, but it is still way off its 52-week high of $8.97 a share.

    Limelight Networks has a market cap of $801.15 million and an enterprise value of $718.44 million. The company also has a decent cash position with around $65.95 in net cash on the books after you back out $2.8 million in debt. LimeLight Networks isn’t profitable yet, and the company is nowhere near as dominate as Akamai in the space. However, if the entire sector wants to run, then this spec stock should follow.

    Here’s how I would trade Limelight Networks: First, I wouldn’t buy the stock until it starts to trade above some stiff near-term overhead resistance at around $7.37 to $7.45 a share. If the stock takes out those levels, then I would be specifically in this trade for a potential breakout in the stock. I would add heavily to my LLNW long once it broke out above $8.58 and $8.97 a share. The move then would be for a massive short covering rally since the stock would be trading at levels not seen since 2008.

    Keep in mind that around 4.4% of the float is currently sold short by the bears on this stock. I expect those shorts to increase their bets if the stock can trade back up to its 52-week highs. They’ll all be thinking that Akamai is going to eat their lunch and the stock will fail to breakout again, but I think a second re-test of the highs will embolden the momentum-driven hedge funds to spike this stock into breakout territory.

    F5 Networks

    Another beaten-down networking and cloud computing play that’s been absolutely annihilated this year is F5 Networks (FFIV), a provider of technology that optimizes the delivery of network-based applications and the security, performance and availability of servers, data storage devices and other network resources. So far in 2011 this stock has dropped a whopping 26%. To put it more into context, shares of F5 Networks have dropped from a high hit in February of $145.76 to its current price of around $96 a share.

    The company has a current market cap of $7.7 billion an enterprise value of $7.09 billion, and it trades at a forward price-to-earnings of 22. This is another cash-rich tech firm that has around $485 million of cash on its balance sheet and zero debt. F5 Networks is set to report earnings on April 20. If this company says anything remotely as good as Riverbed just did, then I expect this stock to experience a big short squeeze following the earnings report. The current short interest as a percentage of the float for FFIV stands at around 4%.

    You can buy this stock now with a mental stop at around $92 or even higher depending on the size of your position. I would add to the trade above $103 and then add heavy if the stock takes out its 50-day and 200-day moving averages.

    Keep in mind I would want to see some big volume start moving into the stock that’s well above the three-month average trading activity of 4.3 million shares if it can continue to rise. If the volume doesn’t show up, then I would consider this a dead cat bounce and move on.

    F5, one of the worst-performing S&P 500 stocks of 2011, shows up on a recent list of 40 Stocks Analysts Are Insanely Bullish About.

    Finisar

    The poster child for a beaten-down cloud-related tech stock has to be Finisar (FNSR), a provider of optical subsystems and components that connect short-distance local area networks, storage area networks, longer-distance metropolitan area networks, fiber-to-the-home networks, cable television networks and wide area networks. Shares of Finisar have dropped around 16% so far in 2011. To put that into context, the stock has plunged from its high in March of $44 to its current price of around $25 a share.

    That huge drop in the stock came after the company forecasted fourth-quarter results that missed Wall Street estimates by a mile. On March 8, Finisar projected revenue of $235 million to $250 million, which was well below the average analyst estimate of $269 million, and EPS of 31 cents to 35 cents, again well below the average estimate of 48 cents.

    Despite those poor numbers, I think market players can get long some shares of FNSR for a trade. From a technical standpoint, I like that the stock has been making some higher lows for the past month and its now trending back above its 200-day moving average of $23.30.

    I would buy this stock now and add heavily if it breaks out some near-term overhead resistance at around $26.50 a share. A move above that level would put the stock into position to fill some of the gap that was created when shares plunged following the poor forecast. I would simply use a mental stop that’s just below the 200-day moving average if you decide to get long FNSR.

    It’s worth noting that this stock is heavily shorted with around 10% of the float currently sold short by the bears. This could lead to a big short covering rally in the stock if momentum money swings back into the tech sector, and if it starts to trade into that gap area.

    If you like the idea of playing beaten-down networking communications equipment players like Finisar off of the potential trend back into the cloud and networking stocks (remember they’ll fit together perfectly in the Internet ecosystem), then you should also take a look at JDS Uniphase (JDSU). Since February, this stock has trended down sharply from a high of $29.12 to its current price of around $18.60 a share.

    Finisar is one of the top holdings of Maverick Capital.

    Alcatel-Lucent

    One final tech play that isn’t beaten-down this year but still looks poised to rip higher and trade off the potential trend back into cloud and networking stocks is Alcatel-Lucent (ALU). This company provides products, solutions and transformation services that enable service providers, enterprises, governments and strategic industries to deliver voice, data and video communication services to end-users worldwide. So far in 2011, this stock has skyrocketed, returning over 100%. Relax if you’ve missed that move because it could be setting up right now to tend even higher.

    Now I said this stock isn’t being beaten-down this year, and that’s obviously true. But this stock did experienced one of the greatest longer-term beat-downs of all-time when shares fell from highs of over $80 in 2000 to its current price of around $6 a share. Now the company is on the comeback trail as cloud computing, networking services and exploding smartphone usage all collide and growth accelerates. This is spurring a global communications infrastructure build-out that could last for years.

    Due to Alcatel-Lucent’s strong position in international markets, the company is sitting in the sweet spot to reap huge profits off of this infrastructure build-out trend. The company operates in over 130 countries and is known to be one of the most experienced players in the field.

    From a technical standpoint, this stock is just starting to break out on monster volume. Shares of Alcatel-Lucent have started to trade above some past overhead resistance at around $5.80 to $5.90 a share on volume that registered over 52 million shares on Thursday. The three-month average trading activity on ALU is normally around 38 million shares, so this breakout is being confirmed with strong volume trends.

    The next significant resistance area on the stock won’t come into play until around $7.50 and after that $10 a share. This leaves plenty of upside even from current levels on the stock. I would look to snatch up some shares of ALU on any pullback.

    To see more cloud and networking stock plays, including Acme Packet (APKT) and VMware (VMW), check out the Beaten-Down Cloud & Networking Stocks portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

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    At the time of publication, author had no positions in stocks mentioned.

    Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.