It's hard to pick stocks in cloud computing, because so many of them have become absurdly overvalued. So what I do is look at a handful of them, learn about the companies, and try to figure out which ones have true staying power. Then you look for opportunities to buy them on pullbacks.

Riverbed is a company that I have been following for several years. I have published a profile of Riverbed here on my new site, Investor Uprising, in which I try to explain how Riverbed plans to expand. A true "best of breed" player in WAN optimization, Riverbed is now looking to use its leverage in that market to branch out and grow on more fronts. I had a chance to meet with several Riverbed executives at Interop in Las Vegas, and following those meetings I think the company is on the verge of taking it to the next nevel. CEO Jerry Kennelly very clearly described some growth opportunities for the company that will take it from a point-product company to a multifaceted networking power.

Here's the important thing about Riverbed: Its technology takes advantages of long-term trends in networking in computing: Data-center consoldiation, the migration of apps from the enterprise to the cloud, and outsourced networking optimization. If you are asking what this all means because it's too many buzzwords -- it's that large and small companies both are looking to outsource more of their technology and networking needs to service providers who operate in the "cloud" -- providing any application or computing online, at any time.

The reason this is important for Riverbed is because it flies in the face of what has built the existing networking juggernaut: Cisco Systems. Cisco is built on the emergence of Ethernet networks and IP routing. It comes from an era in which companies hired armies of IT people to configure and deploy Ethernet switches and routers. All of that is moving to the cloud and massive data centers run by service providers. The interesting thing here is that Cisco has displayed weakness in selling data-center products: Its software is aging and lacks the scale to handle the shift.

This is a profound shift and one to carefully watch in the networking space. On the valuation, Riverbed recently pulled back $10 from an all-time high and I used the opportunity to pick up some shares. The P/E is a palatable 30, given a growth rate in excess of 40%. The PEG is now 1.40, which is well of recent highs. You have to pay up for this company because it has such huge prospects.

(Disclosure: Long RVBD).

Well it's time for Markets Gone Wild, but you may not have the DVD, so let's recap: The Fed has been heavily telegraphing an accelerated money-printing schedule, driving bankers, traders, and speculators into all matter of commodities, stocks, and various exotic financial instruments.

Here's a summary:

* Silver reached a new 30-year high this morning. Incredibly bullish action. I think you should stay long silver here, a way to do that is SLV, or a mining company like Pan American Silver (PAAS), or silver futures. (Disclosure: I'm long all of the above). I've been bullish on silver for what seems like forever, and I remain so.

* Gold made a new high, and pulled back. With more money-printing on the way, it looks poised to break out, again.

* Our Riverbed/FFIV pairs trade worked out okay, in a strange way. F5 Networks (FFIV) has climbed 14% since we spotlighted the idea (we were short), but Riverbed (RVBD) is up 30% (we were long), so if you did the pairs long/short trade the difference has netted about 15%. Not bad for a month's work. The philosophy of this trade worked out okay -- the cloud "bubble" had pushed FFIV to a more unreasonalbe valuation, and it was time for Riverbed to catch up. (Disclosure: I am out of the trade, I think "cloud networking stocks" are getting overextended, though I still like Riverbed long term).

* New highs in stocks we like: EBIX, RVBD, PAAS

* Remember Right Now (RNOW)? Incredibly strong stock. Methinks something is up.

 

Yesterday I was invited onto CNBC to discuss "Cloud Computing," an incredibly broad topic that somehow got boiled down to four stocks, thanks to the magic of television.

The sector is getting a bit overheated and I have been working out some ideas on how to head and/or short selected stocks. Right now I'm focused on the networking stocks because some of them are getting quite overvalued. CNBC correctly asked me how one could possibly short such a hot sector to which my answer is: hedge.

Anyhow, you can see the clip below. There is also a recap on CNBC.com.

The idea I came up with is that you could hedge with a pairs trade. After sifting through some names and valuations, I have decided that F5 Networks (FFIV) is more overvalued than Riverbed (RVBD), and I like Riverbed better in the long term. So a possible trade here is to stay long Riverbed, and short F5 as a hedge. The premise is that F5 is trading at a richer valuation with 10X sales and Riverbed is "only" trading at 6X sales. I would also note that Riverbed is smaller and growing faster so has more room to grow into its valuation.

The market is pretty fascinating right now. It is currently featuring 100-point intra-month S&P swings, a solid rally in eccentric commodities like coffee, currencies bouncing around like ping-pong balls, and wild technology M&A speculation. What's not to like?

My bearish thinking is beginning to morph into a more bullish tilt. The reasoning for this is three-fold: 1) The Feds are printing more money 2) Technical "Commitment of Traders" (COT) reports show institutional buyers getting more bullish and retail investors getting more bearish -- usually a bullish indicator 3) it's looking like the bears have had trouble taking the market down in September, which is when they usually take it down.

Just because an economy is crummy, or just sub-par, does not mean you cannot make money. Plenty of companies have proven that innovation can create value even in a down economy.

This was a fascinating topic to me in the earlier part of the last recession as I watched Google and Whole Foods Markets climb steadily during the recession of 2000-2002. If you think about it, these were very strong companies that created lots of value, jobs, and profits during a period in which the economy was stagnant or shrinking.

What about now? Regardless of the worst economy in 80 years, there are still opportunities.

To give you some examples, where are some more ways companies create value in a down economy:

• Providing a technology that performs a task more efficiently, better, and cheaper. This is a basic goal of technology innovation: Give your customer 5X the power at the same price, then they buy a product. Some examples I see of companies doing this include Riverbed (RVBD), in enterprise networking, CREE in LED lighting, and Western Digital (WDC) in digital storage. All three of these companies have grown during the "Great Recession."
• Scientific discovery in healthcare. A scientific discovery can create value no matter what the macro economy is doing. Many biotech companies are still booming and creating value, regardless of what the economy does. This is because they can make discoveries that create new markets out of thin air. Some quick examples: Qiagen (QGEN) develops new test for human papillomavirus -- its stock us up 50% in five years. Illumina (ILMN) has outstepped the competition in sequencing genes. In five years, its stock is up 500%, compared with the S&P being down in the single digits.
• Providing a high quality product and brand. Markets are constantly choked by competition, but if you can consistently provide high-quality product that gets consumers excited, you will take market share and grow your brand. Some great examples of this are Apple (AAPL), Green Mountain Coffee Roasters (GMCR), True Religion Apparel (TRLG), and the Intercontinental Exchange (ICE). All of these companies have grown in the last five years. In fact, Green Mountain tripled revenue in the years 2007-2009, and ICE doubled reveune from 2007-2009.

Is Riverbed Technology Inc. now the undisputed leader in the high-growth WAN optimization networking space? CEO Jerry M. Kennelly thinks so. In fact, in an interview today with The Rayno Report following yesterday's earnings announcement, Kennelly said that Riverbed's big numbers in 2009 have now established it as the ""recognized and permanent" leader of the WAN op. Given the company's growth, there's pretty good reason to believe Kennelly. In announcing earnings, the company hit a new quarterly revenue record with $113.2 million in sales, up 10% over the prior quarter and 23% over the prior year. For the fiscal year 2009, GAAP revenue was $394.1 million, up 18% from $333.3 million in fiscal year 2008. The company says it now has 7,300 customers worldwide. It generated $100 million in operating cash flow in 2009, and added to its cash stockpile, with $325 million in cash and marketable securities.