By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month
From Cabot Wealth Advisory 4/19/12 Sign up for free Cabot Wealth Advisory e-newsletter
You don't need to own Apple (AAPL) to be a successful investor. In fact, as a growth investor, I think there are better risk/reward relationships to be found among numerous less popular stocks. The high-potential stock I'm spotlighting today is far less popular than Apple, and thus has much more room to grow.
Sourcefire (FIRE) is a leading provider of network security software and services, setting up firewalls, dealing with malware and in general creating safe and secure computing environments. What I like about it, aside from its positive chart, are two recent trends in its numbers.
First is the trend to accelerating growth of revenues; they were up 19%, 25% and 40% in the latest three quarters.
Second is the trend to fatter after-tax profit margins; they were 6.5%, 12.6% and 14.2% in the last three quarters.
As a result, the first quarter of this year saw earnings surge 47% to $0.25 per share.
The stock was recommended earlier this month in Cabot Top Ten Trader. After reviewing the business, editor Mike Cintolo wrote this about FIRE's chart:
"FIRE wasn't a leader during 2010 or 2011, as the stock traded in a wide 20-to-30-range for months. But that changed in February, when the stock staged a giant earnings gap higher to 46 (volume was nearly 10 times average!) following a blowout earnings report. Since then, shares have crawled higher, testing their 25-day moving average last week. FIRE is volatile and somewhat thinly traded (about $30 million per day), but its recent decline is setting up a decent opportunity. You could buy some down a point or two."
The stock was trading at 48 then and, sure enough, subscribers who waited had an opportunity a few days later to snag it under 46. But now it's topped 50. What to do now?
You could just rush in and buy here, but it would probably be wiser to take a look at the latest issue of Cabot Top Ten Trader here, to read Mike's latest advice on the stock ... as well as to learn about similar high-potential stocks. Click here for more information.
From Cabot Wealth Advisory 3/15/12 Sign up for free Cabot Wealth Advisory e-newsletter
I'm bullish on the current market. Of course, I'm also keeping my feet on the ground, knowing that after a three-month advance, some sharp shakeouts or even a full-blown 5% market decline could be in the cards. But the overall trend remains very healthy, both among the indexes and leading stocks.
My biggest piece of advice for you right now is to stay focused on the leaders of this advance. In my experience, it's around this time where investors either (a) fall back in love with some old, past leaders whose best days are behind them, or (b) start buying up speculative or lagging stocks.
In a bull market, you might get away with buying a few dogs, but your best course of action is to stick with the primary or secondary leaders of the advance. In this environment, if you buy the right stocks at opportune entry points, your odds of success are very high.
For my stock idea today, I'm going to highlight a second-tier leader that recently gapped up on earnings. Better yet, the stock really hasn't been a leader before, so it's fresher merchandise—meaning institutional investors are likely to want to own more going forward.
The stock is Sourcefire (FIRE), an emerging leader in Internet security. Here's what I wrote about it in Cabot Top Ten Trader back on February 27:
"The rise of organized hacker groups like Anonymous and LulzSec has propelled cybercrime and cyber-security out of the darkness of corporate server rooms and into the limelight of mainstream news. This new era of online crime has prompted corporations to invest heavily in network security, directly benefiting companies like Sourcefire. Sourcefire's 3D (for discover, determine and defend) software and FirePOWER acceleration technology secure networks and applications without sacrificing performance and efficiency. The company's main customers are located in the finance, government, health care, manufacturing and technology industries. The latest round of cyber attacks against the federal government and major financial institutions was a boon for Sourcefire, prompting better-than-expected fourth-quarter earnings from the company. What's more, citing its strong market position, the company also said it sees fiscal first quarter revenue of $40 million to $42 million, easily topping Wall Street's consensus estimates."
The stock exploded higher following those first quarter results—FIRE shot ahead 26% on 10 times average volume. Granted, the stock wasn't the most well-traded name before the report (about $17 million of daily dollar volume), but the move was decisive and took the stock out of a multi-year rest period.
I don't call FIRE a first-tier leader; it's not going to be an institutional favorite anytime soon because of its relatively low trading volume. But I do think it's a new leader, and the combination of the stock's explosive earnings move, its resilience since the gap and the firm's history of strong sales and earnings growth, means higher prices are likely.
You could buy a little in the upper-40s, but I prefer to look for weakness, aiming to get in around 45 with a stop around 38 or 39.
Editors Note: Mike Cintolo is editor of Cabot Market Letter, the company's flagship publication. Hulbert Financial Digest—the keeper of the keys when it comes to newsletter performance—just ranked Cabot Market Letter as the #5 Letter (out of 146!) for five-year performance. Mike has achieved steady, dynamic gains by combining top-notch stock picking (he already owns most of the leaders of the new bull market) and disciplined market timing, allowing subscribers to sidestep bear markets and keep what they've earned. If you'd like to benefit from his system and discover the leaders of this bull cycle, we urge you to give Cabot Market Letter a try today. Click here now!
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3/15/12 Sourcefire (FIRE): Emerging leader in Internet security