Market Overview
Now that was an interesting week, as countless sectors imploded (banks/REITs/airlines/energy) while at the same time money rushed into mega-cap technology. By week’s end the S&P 500 had risen 1.43%, the Dow had fallen 0.15%, and the Nasdaq way outperformed, having gained 4.41%.
Buckle up for continued volatility as the Federal Reserve announcement on Wednesday afternoon has the potential to be a major market-moving event.
The Stock – Fortinet (FTNT)
Why the Strength
Many analysts expect cloud and software spending to slow this year due to a challenging economic environment, but cybersecurity is likely to outperform, fueled by the accelerating threat of cyberattacks, the demands of hybrid work and increased data privacy regulations.
Fortinet occupies a top spot in the cybersecurity software space by using artificial intelligence (AI) and machine learning (ML) to stay ahead of evolving threats. (The company’s FortiNDR, for instance, detects threats that may slip past traditional security solutions by using both ML and AI.) Fortinet’s AI-based offerings have attracted a massive customer base of 635,000 (including most Fortune 500 companies), and the firm has a leading position in the firewall market with FortiGate being the world’s most deployed network firewall.
Estimate-beating Q4 earnings of 44 cents per share, up 76% from a year ago, and sales of $1.3 billion (up 33%), are reasons for the stock’s resilience, with both numbers driven by strong demand for the firm’s core and enhanced (newer) technology platforms; the results prompted a major Wall Street institution to boost its price target (another reason for the strength).
Management said it continues to gain market share in the service security industry and boasted eye-opening product revenue growth of 42% in that segment during Q4. Service revenue, meanwhile, was up almost 30%, driven by the strength of its security subscriptions. Billings (a leading indicator) of $1.7 billion also hit a record in Q4 and passed the $5 billion mark for all of 2022, with both increasing 30%, and the company hit an additional record by adding 6,200 new logos in Q4. Looking ahead, Fortinet expects the growth to continue, guiding for Q1 EPS of about 28 cents a share (up 50% if realized) and midpoint revenue of $1.2 billion (up 25%).
Technical Analysis
FTNT had a great post-pandemic run to the mid-70s in late 2021 and then fell on hard times—though, compared to most cybersecurity peers, the damage wasn’t that bad. Yes, the stock did fall about 45% from high to low, but for the most part, the trading action was more sideways than down. And then FTNT changed character late last year, with some tightness near 50 and a nice pre- and post-earnings rally into February—with the latest batch of tight trading coming on low volume and standing in contrast to the broad market. Stop – 54.5
The Covered Call Trade
Buy Fortinet (FTNT) Stock at 62, Sell to Open May 65 Strike Calls (exp. 5/19) for $2.50, or a Net Price of 59.5 or less
Static Return: $250 per covered call (4.2%)
Breakeven: 59.5
Covered Call Return (if assigned): $550 per covered call (9.24%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 59.5 or less. (In this case 62 minus 2.50 = 59.5. Or another example is you could pay 62.25 for the stock and sell the call for 2.75, which also equals 59.5)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on March 28, 2023.
