“$25 Cyber Security Doubler to Hit $50 — With or Without You” (Navellier)

By Travis Johnson, Stock Gumshoe, March 16, 2010

I know I should stop rising to the bait of these Louis Navellier teasers … but I can’t help myself.

Every month or two he throws out a new teaser along the lines of this one — some teased pick or another that is going to double “with or without you” … he’s not alone in this, but it’s a particular focus of the Investorplace copywriters, so we see these teasers all the time from Robert Hsu, too, and from a couple of the other newsletters they publish.

This teaser happens to be for the Emerging Growth newsletter, one of four newsletters that Navellier publishes that all have slightly different target areas but the same basic philosophy: buy the stuff that’s going up and that has earnings momentum. That strategy has, to be fair, done Navellier nicely during some markets — he has had periods where some of his newsletters were ranked very high by Hulbert, but of course it doesn’t necessarily outperform in all markets. Emerging Growth is the highest ranked of Navellier’s newsletters according to the reviews we’ve seen so far at Stock Gumshoe Reviews, but it’s not exactly beloved and none of his newsletters make it into the Top 50.

Still, that doesn’t mean that looking for stocks with earnings momentum and a rising share price is a bad thing — and perhaps this latest teased idea of his will appeal to us … only way to find out is to identify it, eh? That is, unless you’re rushing out to pay for a subscription (the “sale” price is right around $1,000).

So what do we learn about this little tease, other than the fact that it’s in cyber security, and it’s priced around $25?

Here’s the big picture:

“The U.S government is expected to increase its IT security spending from $7.9 billion last year to $11.9 billion in 2014.

“The U.S. government has clearly targeted this company for millions in new contracts by asking the company to clear more employees for high tech security clearance—that’s on top of the millions of dollars in existing security contracts.
As a result, sales and earnings will continue to shoot through the roof, as the company’s suite of security applications are second to none and have already been proven on the federal, state, and local levels.

“For these reasons, this company has one heck of a powerful recurring revenue stream that’s not only tripled investors’ money in 2009…

“…but has been one of the best performing investments during the collapse, delivering more than 350% gains over the past two years.”

And the small picture, where we get a few more clues:

“The Biggest Profits Will Come in the Next 30 Days

“That’s because the company’s earnings will be released on April 26th.

“And I’m expecting another breakout after earnings this time around.

“The first time around the company reported a 123% earnings blowout—and this time it will be even bigger as Wall Street recognizes the huge increase in government spending and bids this one higher and higher.”

OK — so, releasing earnings April 26th, reported 123% earnings growth last time out, tripled in 2009 … this must be …

Sourcefire (FIRE — click here for a free instant trend analysis of FIRE from Marketclub which comes in right now at “super-sexy” — Marketclub is one of my advertising partners)

I wrote about a different cybersecurity company, Vasco Data Security (VDSI) a few days ago in response to a Motley Fool teaser, and last year I spent some time hunting down Kratos Defense (KTOS) for a Breakaway Investor teaser that’s still making the rounds. Both of those are also at least partly in this cyber-defense space and are quite a bit cheaper on an earnings multiple basis, as are the big firms that I mentioned in that Fool writeup … but from general reading in the space it seems like Sourcefire is currently the hottest cybersecurity play … and by “hot” I mean, “expensive” and “heavily covered in the press.” Not that either is necessarily a bad thing, if you’ve got some growth behind your stock as Sourcefire does.

And growth is catnip for Navellier, of course. Why Sourcefire? Well, if you use their adjusted numbers they did report 123% earnings growth last quarter (29 cents, up from 13 cents per share), and they will be releasing their next quarterly earnings announcement on April 26. They are largely a government contractor, specialized in “intrusion prevention.” And the stock did roughly triple in 2009.

Does that mean they really will have a blowout quarter next time out? Well, government and corporate security spending may well be evergreen and growing, which provides a nice foundation, but that doesn’t guarantee the performance of any one stock, of course. Analysts have been really wrong on Sourcefire so far, so the last four quarter in a row have all been “blowout” beats of the analyst estimates, so that seems like a reasonable pattern to bet on. Analysts think they’ll earn seven cents per share in the first quarter, which is right at the top of the guidance range offered by the company — this would be a sequential drop from the last two quarters, but it looks like the third and fourth quarters for Sourcefire are probably the strongest, seasonally, so it will be tough to judge 2010 until a year from now.

2009 was FIRE’s first profitable year, but not the first time they’ve caught investors’ attention — Check Point Software, a much larger Israeli cyber-security company, tried to buy them back in 2006 but was rebuffed by the Treasury Dept., and the two firms eventually gave up the merger idea … and Sourcefire then went public about a year later. After going public at about $15 the stock had a rough year or two, suffering through the disappointment of IPO investors who lost interest in a nonprofitable firm and then the financial crisis which helped drive the shares down under $5 for a brief while … then they become profitable, cyber security gets exciting again, investors realize they have a cool name and some good contracts, and the stock rockets back up to where we are now, within a buck or two of their 52-week highs and, yes, right around $25 ($26.25 as I type).

The blowout earnings releases of the past year did lead to rising stock prices — but then again, last year everything went up almost all the time after March, and good news only added fuel to the fire. The stock is not dirt cheap at this point (if it were, Navellier wouldn’t like it), they are expected to grow at something like 30% a year for the next few years, and the forward PE ratio is 37 if you use the 2011 guesses (it’s 50 if you use the guess for the current year) &