We have seen it a hundred times, companies beat sales and profit estimates yet their stocks collapse on the headlines. Investors care most about the forward guidance. This is obviously wrong since in most cases, management of any sort is simply being cautious given the geopolitical headline threats that sill loom.
Case in point, last night FireEye (NASDAQ:FEYE) reported earnings and FireEye stock is falling 12% on the news. This is even though management beat revenues and earnings expectations. The problem was that they lowered their forward guidance. Traders want to be wowed and this one lacked luster.
Luckily for investors, FEYE stock came into the event from a position of strength and up 14% year-to-date, which is more than the S&P 500. But not all credit falls to it. The whole sector is also up and some even more. Splunk (NASDAQ:SPLK) and Fortinet (NASDAQ:FTNT) to name two are also up 22% and 15% for the same period.
Wall Street is gaga over cybersecurity. Incidents like the one Facebook (NASDAQ:FB) had last year raised the overall concern on the threats to extreme levels. Ten years ago when we barely used technology, this wouldn’t have been much of an issue. When we were still using low BAUD dial-up modems, all we needed to do is guard our passwords.
Now our providers require us to use two-step verification codes, thumbprints and soon ocular verification. And even then, we won’t be 100% secure. I am realistic about my expectations. I know that if they want my data, they are going to get it. So I can only slow them down.
Data privacy and network security have become an absolute obsession everywhere. Corporations have no choice but to spend now more than ever on their system integrity. Otherwise, they leave themselves vulnerable to huge penalties and legislative scrutiny. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) recent suffered a multi-billion dollar penalty from the European Union.
This ramp in demand for electronic safety caused a run-up into cybersecurity stocks like FEYE. Consequently, valuations are high. Most are still losing money but investors don’t care.
But I do. These valuations are too high for me to chase the massive run-ups. Dips like today’s dip in FireEye stock could offer points of entry for fast traders or those who want in on the sector.
These are momentum stocks, so they will rarely give us a clear point of entry. They run too fast in either direction making it difficult to get on board. Just since last October, FEYE stock has had five 20% moves and it’s working on its sixth today.
How to Approach FireEye Stock Today
So yes, technically this would make for a decent entry point for a swing trade. But not necessarily for a fundamental investment. For those who are looking for a longer-term thesis, these stocks are still unproven. Nevertheless, given that it’s on a 12% drop and since management didn’t report a major systemic problem for FEYE, it is worthy of a stab.
I am not dissing the company. I acknowledge the need for the FEYE services. We now rely more on technology and connectivity than ever. We knowingly or indirectly put all of our vital information online several times per day. It is only a matter of time before we fall victim to a breach.
But just because there is demand for FireEye services doesn’t mean I should be blind the fundamentals aside. If I am forced to buy an internet security stock to invest in, FEYE would be on my list. But in these uncertain times, I’d prefer to risk my money on surer bets.
If I bet on Apple (NASDAQ:AAPL) for example, all I need to fret is the health of the general market. I am confident that the AAPL fundamentals will stand for years to come. I know there is value below, so I can ignore temporary drawdowns.
When holding a frothy stock like FireEye stock, I need to worry not only about the market in general but also about its own success inside it. So I would be what they call a weak hand, meaning that I would stop myself out of the stock much faster than I would in AAPL or GOOGL.
Why be so careful? FireEye stock has seen better days. It is 80% below its highs of 2014 so clearly things can go wrong. So I would classify going long today as a trade not an investment and it would be imperative to establish a clear stop out point. This varies among investors as we have different risk tolerances.
Technically, the $15 area has served as support on the last few draw-downs so it is important that they hold here. Below that sits the February 2018 lows of $13.60.
In summary, FEYE is a decent stock and it can make for a nice trade on this dip. But for my portfolio and in this jittery market that has so many deadlines looming, I’d rather wait for better timing. I’d feel more comfortable when the political environment is more stable. So I will let this falling knife hit the floor without trying to catch it.
Click here for a bonus video that I recently shared discussing GOOGL stock coming into the earnings. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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