The found of the Columbia, Maryland company -- Martin Roesch -- wrote the open-source security software Snort. So Sourcefire's model is to take continue work on the founder's open-source product while providing a bells-and-whistles version for companies that can pay for the extras.
FIRE had the most bullish chart among 27 stocks added today to the Zacks top-buy list.
The price swung into a steep rise beginning Feb. 1 from $31.38 and has since gained almost entirely through opening gaps after earnings surprises. The most recent, on May 1, has carried the price to Wednesday's high of $59.64. The intra-earnings period was a sideways movement.
I don't think I would use the word "cash cow" to describe Sourcefire's financials. It has only a 3% return on equity but with no long-term debt.
Institutions, however, own nearly all of the shares -- venture capitalists? -- and have bid up the price so that it takes $9.66 is shares to control a dollar in sales.
Sourcefire's earnings show a somewhat unstable degree of seasonality. The 1st and 2nd quarters come in low, and the 3rd and 4th are generally higher. Yet the one losing quarter since 2009 was a 4th quarter.
And even quarter to year-ago quarter, earnings don't show a steady acceleration. Warren Buffett would despite this earnings pattern, I feel confident.
I shall pause now to say that I'm deeply conflicted about this stock. If earnings surprises are driving the uptrend, then why not wait until July to get in, closer to the next earnings?
And a price more than nine times sales in the crowded field of cybersecurity companies -- What's with that?
Of course, two surprise driven rises are no guarantee that a third will occur. And that level of institutional ownership and super-high price is no guarantee that the original investors are going to pull out suddenly, leaving me holding sadly depleted shares.
But still, I worry.
FIRE on average trades 1 million shares a day. The options selection is adequate, open interest is high and the bid/ask spreads are fairly narrow for a low-volume stock.
Implied volatility stands at 52%, near the bottom of the six-month range. Volatility ranged about 70% through April before declining sharply after the last earnings surprise.
Options traders are pricing in a 68.2% chance that the price will close between $49.29 and $66.55 a month from now, for a maximum gain or loss of 15%.
Sourcefire nexst publishes earnings on July 30.
Decision for my account: I won't be trading FIRE because my account is pretty much fully committed at this point. I'll be doing some pruning into next week as I prepare for the next round of diagonal spreads.
Also, the misgivings I have about Sourcefire's chart and fundamentals -- listed above in painful italics -- make it unlikely that I would try to structure a position at this time. I might look at it again in July as a potential very short-term play keyed to the earnings announcement.
I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.