My Top Two Secure Software Bets

***Note: This message is part of Louis Navellier’s Market 360 e-letter series. If you don’t already receive these email alerts, and would like to, you may sign up to his mailing list here.***

Welcome to part five of Market Maneuvers—our special series to profit through market volatility.

The S&P 500 has finally broken out of its five-day losing streak, which had been caused by three things: 1) The sell-off in China, 2) The “commodity crunch” and 3) Second-quarter earnings announcement season. Last week, I explained why this earnings season is mixed at best, so let’s dig into the first two factors: China and the commodity crunch.

Yesterday, the Shanghai Composite Index experienced its largest one-day drop since 2007. The cause for the sell-off is once again being attributed to margin trading, as well as recent headlines that the Chinese growth engine is tapping on the brakes. While the index has recovered somewhat from its pullback earlier this month, yesterday’s move shows there’s still plenty of uncertainty—and volatility—plaguing Chinese stocks.

The second headline that impacted the market over the past week was a major “commodity crunch” in gold. Prices of the precious metal hit a five-year low, and other commodity related stocks, such as copper and crude oil, slipped last week. The strong U.S. dollar coupled with fears of selling pressure and ebbing demand in China is the main culprit for the recent selloff in commodity stocks.

If you’re feeling nervous about these developments, I’d like to reiterate my advice from previous issues of Market Maneuvers: The U.S. remains an oasis amidst the chaos. While many multinational companies will show slowing sales and earnings, there are still many solid domestic companies bucking the trend with stunning earnings and sales growth. Let’s consider a two of these companies now…

The Cybersecurity Boom

We truly live in a connected world. In just a few decades, computers have transitioned from being luxury goods to essential tools. The same can be said for mobile devices like smartphones and tablets. But, for every piece of hardware out there, it needs software to be useable. And for every piece of software out there, there needs to be a team that is constantly updating the software to make sure that it is secure and user-friendly. So, software companies aren’t going anywhere.

But, it remains to be seen how many of these companies are worth investing in right now. According to Portfolio Grader, there are 147 software companies. On average, these companies earn a 4.75 grade in 2015, which is a B-rating, but on the cusp of a C-rating. However, this is a modest improvement over the average 5.49 rating in 2014.

In order to isolate the best buying opportunities in the software industry, we need to dig deeper. There’s one subset of software companies that are ahead of a powerful trend.

But first, I have a question for you: What do Anthem Inc. (ANTM), Home Depot (HD) Sony Corp. (SNE) and Target Corp. (TGT) have in common?

Well, they’ve all experienced high-profile security breaches in the past few years. It’s no secret that data breaches are on the rise. Just recently, we’ve learned about the massive Office of Personnel Management security breach and the computer failure at the New York Stock Exchange. While it’s unfortunate that these events are becoming the "new normal," this trend has huge implications for organizations across all industries.

According to the Ponemon Institute, 51% of CEOs surveyed reported that their companies experienced cyber-attacks daily. And 43% of U.S. companies had a data breach in the past year. So it’s small wonder why global IT security spending has increased 11% per year over the past decade.

There are two companies that are on the cutting edge of cybersecurity solutions, and they just so happen to be highly rated in Portfolio Grader. Let’s take a look…

Two Cybersecurity Companies to Buy Now

Palo Alto Networks

Palo Alto Networks Inc. (PANW) is a leading provider of enterprise security platforms. The firm supplies products like firewalls, website blockers and mobile security managers to businesses, service providers and government organizations around the world. And given the recent security breaches, business is booming for companies like Palo Alto Networks.

Palo Alto Networks serves more than 19,000 customers, including 75 of the Fortune 100, across 120 countries. It has been recognized as an enterprise firewall market leader by Gartner for the past three years running. Last year, its revenues jumped 51% over the prior year, making it the fastest growing publicly-traded company in the industry.

This quarter, analysts expect Palo Alto Networks’ sales to grow 43.5% over last year, and for EPS to soar 127.3%. However, given that the firm has posted double-digit earnings surprises for three quarters in a row, it’ll likely do even better. Palo Alto Networks will likely release its next quarterly report in early September. In the meantime, PANW is an A-rated Strong Buy.

VASCO Data Security

VASCO Data Security International Inc. (VDSI) is a world leader in developing and providing security systems for financial institutions, with more than half of the top 100 global banks relying on its services. The company provides two-factor authentication solutions, which ensure secure user login and only authenticated user access.

It also offers electronic signature, which confirms the authenticity and integrity of a financial transaction. Some of VDSI’s offerings include: VACMAN, IDENTIKEY Authentication Server, DIGIPASS for APPS, DIGIPASS clients and MYDIGITPASS.COM, as well as IDENTIKEY Appliance, IDENTIKEY Virtual Appliance and IDENTIKEY Federation Server. VASCO Data Security sells its security solutions through its direct sales force, distributors, resellers and systems integrators.

In early May, VASCO walloped estimates for the first quarter. Earnings grew 278% year-over-year to $0.34 per share, which beat analysts’ estimates for $0.21 per share by 61.9%. Sales increased 67.8% year-over-year to $65.1 million, which beat the consensus estimate for $54.5 million by 19.4%.

In just a few hours, VASCO is scheduled to release its second-quarter results. The consensus estimate is for $0.28 EPS on $64.67 million in revenue. Compared with Q2 2014, this translates to 64.7% earnings growth and 35.7% sales growth. I’m looking for VASCO to beat expectations once again. VDSI is an A-rated Strong Buy. (Please note: VDSI is a Moderately Aggressive stock, so expect some swings with this position.)

I’ll be in touch on Thursday with your next Market Maneuvers, so make sure that you’re signed up to my mailing list before then. We’ll be covering the latest headlines and the best opportunities in retail and consumer staples.

Sincerely,

Louis Navellier

Louis Navellier

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