This Cyber Security Stock is Ready to Catch Fire

Posted On April 15, 2015 11:53 am

Cyber security is seen as both the one of greatest threats and largest opportunities of the digital age. High profile hackings both private companies such as Target (TGT) and Sony to government spying (Angela Merkel’s cell phone!) finally reaching the worldwide stage as President Obama hosted the cyber summit at Stanford in February.

That coincided with the earning’s releases from the top publicly traded cyber security companies such CyberArk (CYBR) Palo Alto Networks (PANW) and FireEye (FEYE) and each delivered better than expected results.   The confluence of public awareness with a tangible business prospects help catapult the shares of each up some 30% in the month of February.

While PANW and CYBR remain near all-time highs, shares of FireEye, which was the first to go public back in early 2013, are still off some 55% from their 2014 peak of $96 a share. But I expect FireEye shares to start out performing.

Cyber security will remain a big story throughout 2015. The power of publicity was back on display last Friday as FireEye shares jumped over 5.5% to $43.30 on word it and its CEO would be featured on 60 Minutes.  Indeed they were. And indeed come Monday morning the stock was greeted with a “sell the news” response for giving back nearly all the gains over the next two days.

But at this point shares have held the new important support level at the 20 and 50 dma after that igniting candle. I think this offers a good entry point for building a bullish position.

FEYE 041415

From a fundamental standpoint FireEye is expected to grow revenues by 45% to $620 million in 2015. It, and the rest of the sector’s growth, is being fueled by increased IT spending across most industries, especially financial and telecommunication firms. Spending on software and digital security is expected to double over the next two years to an estimated $40 billion.

But FireEye is still far from profitable and is expected to post a loss of $0.50 a share for this quarter when it reports on April 30th.   There was also an unwelcomed secondary last year in which insiders unloaded shares near the highs that left investors feeling misled by management. This may help explain the nearly 22% of the float which is sold short. Of course such a high short interest can actually become a bullish catalyst as it represents embedded buyers and leaves the stock vulnerable to a squeeze.

The Trade:

I am keeping this simple with a straightforward purchase of calls. Specifically;

I’m buying September $45 calls for $4.00 a contract.

This provides a sufficiently long time horizon for my $60 price target to be reached.   Even though this a relatively low cost call if one wants to further manage risk consider using a stop loss of a close below $37 for exiting position to reduce potential loss.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.