Trade This Cyber-Security Stock for a Potential 14% Gain
This kind of terrorism does not cause physical harm, but it can destroy a business overnight. They are costly and can quickly deteriorate a client base.
Cyber attacks are on the rise… and they are causing cyber-security stocks to spike, providing great opportunities for traders.
In the past few months, some of the biggest companies have fallen victim to cyber attack, causing their stock prices to plummet. Sony (NYSE: SNE), for example, lost 15% of its market value after hackers compromised the company’s customer database. Citibank (NYSE: C) shares fell #-ad_banner-#sharply after the personal information of more than 360,000 clients was tapped. Monsanto’s (NYSE: MON) stock price dropped after the hacker group Anonymous broke into the company’s website.
According to the Ponemon Institute, data breaches such as these cost a company an average of $7.2 million per data breach occurrence. However, the real costs of a hacking event can be far more significant. Sony, for example, estimates the recent attacks cost the company about $171 million. The need for companies to protect themselves as best as possible from these attacks, is making cyber security an even bigger business.
Of the five pure-play cyber-security stocks out there, my trading favorite is Israeli company Check Point Security Systems (Nasdaq: CHKP). This is because this high momentum stock has surged nearly 40% this year and shows more upside potential ahead. It also has a strong fundamental outlook to back up its technical growth outlook.
Founded in 1993, Check Point has quickly grown to become one of the largest computer security company’s in the world, with more than 2,200 employees and thousands of clients across the globe.
Offering a range of software and hardware solutions, the company is best known for its FireWall-1 and Stateful inspection technologies, which offer customized protection solutions against hackers, spyware and identity theft.
Check Point expanded its reach about two years ago, when it purchased FaceTime Communications’ application database. Doing so added more than 50,000 security controls and applications to the company’s repertoire. More recently, Check Point bought Nokia’s (NYSE: NOK) security appliance division, helping to further expand its security presence.
Adding new products and features to its already strong line-up has boosted the company’s cachet, creating an outstanding technical picture. For the past two years, shares have been on a major uptrend, climbing about 132% from a low of about $26.50 to a ten-year high of $61.46.
In June 2010, the stock tested support marked by the Major uptrend line which, at that time, intersected around $28.82. Appearing as if it might break the trend line, it instead bounced off this level and formed an accelerated uptrend line.
Shares briefly stalled around $47, but in early 2011, the stock surpassed this resistance point, bullishly breaking an initial ascending triangle pattern.
Continuing upward the stock plateaued near $56. This level marks the current intersection of the accelerated uptrend line.
However, in late June 2011, Check Point broke $56.34, bullishly completing a second small ascending triangle pattern. Shares have been making their way higher since.
During the July 18 trading week, the stock tested a 10-year high at $61.46, after the company reported strong second-quarter results. Shares have been hovering near this high and look like they ready to move higher.
According to the measuring principle for a triangle, calculated by adding the height of the triangle to the breakout level, Check Point should reach a minimum target of $65.57 ($56.34-$47.11=$9.23; $9.23+$56.34=$65.57).
At current levels, this represents at least a 14% return. However, with no near-term resistance in sight, the stock could potentially test its all-time peak of $118.58, hit during the hi-tech glory days of early 2000.
The company’s technical growth potential is backed by strong fundamentals. In mid-July, the company reported better-than-expected second-quarter results, posting a 15% increase in revenue to $300.6 million, from $261.1 million in the year-ago period. The increase was driven by strong sales of specialized software and hardware security applications.
With security breaches likely to remain an issue in the upcoming quarter, Check Point projects sales will increase at least 9.8% to $300-$308 million, from $273.2 million in the comparable year-ago quarter.
For the full 2011 year, Check Point expects revenue to come in at $1.3 billion, representing at least an 11.8% increase from last year. By 2012, the 24 analysts following the company forecast revenue will increase a further 10.8%, to about $1.4 billion.
The earnings outlook is also strong.
Second-quarter earnings rose 17% to $0.68, from $0.58 in the year-earlier quarter. Analysts expected earnings of just $0.66.
For the upcoming third-quarter, the company projects earnings in the range of $0.67-$0.70, representing at least a 6% rise from the $0.63 earned in the year-ago quarter.
With increasing demand for Check Point’s software and hardware solutions, the company expects full-year earnings will be in the range of $2.77-$2.84, a 14.5% gain from the $2.48 earned last year.
Analysts project Check Point’s earnings will increase at least another 10.5%, to $3.14 in 2012.
Check Point has a solid balance sheet with $1.1 billion in cash and no long-term debt. This liquidity should give the company the financial flexibility to continue developing and marketing new security applications and products.
Given the company’s strong technical and fundamental outlook, I plan to go long on this cyber security stock.
Action to Take –> I will enter a position at the opening of trading on Monday, Aug. 1. Based on the measuring principle, my target is $65.57. My stop-loss is $53.27, just below the current support level and the current intersection of the accelerated uptrend line. The risk/reward ratio is approximately 2.6:1.