Sunday Edition: How The Other News This Week Makes For A Possible Buying Opportunity

May 21, 2017

Sunday Edition: How The Other News This Week Makes For A Possible Buying Opportunity

There was a story this week that was largely overshadowed by all the noise in Washington.

An unprecedented cyber attack, the WannaCry ransomware attack, began infecting tens of thousands of computers all over the world on Friday, May 12.

By Monday morning, there were reports that the attack had hit targets like Britain’s National Health Service, the Russian Interior Ministry, FedEx, French carmaker Renault, and Spanish telecommunications firm Telefónica.

Transmitted via email, the WannaCry attack spread across local networks to Microsoft Windows operating systems that hadn’t yet been updated with the most recent security updates using the EternalBlue exploit developed by the National Security Agency (NSA) which had been stolen, and then leaked to and released by The Shadow Brokers hacker group a month ago.

The attack encrypted files on impacted computers and networks and demanded ransom be paid in bitcoin in exchange for the decryption key to unlock the files.

The U.S. managed to avoid being hit hard by the attack along with the rest of the world thanks to an anonymous 22-year old British researcher who found a “kill switch” in the code of the attack that enabled the researcher to shut it down before it could continue to spread.

What this story underscored for me are the incredible vulnerabilities of the digital age we live in, and the the fact that this malware spread like wildfire and impacted such large and important systems made me think how this is likely a sign of things to come.

As systems become more sophisticated, so too will hackers. And as governments continue to stockpile cyber weapons for future offensive or defensive cyber operations, it isn’t hard to imagine those cyber weapons will be leaked to or stolen by hackers and used against the general public just as the NSA’s EternalBlue was used for the WannaCry attack.

With all of this in mind this week, I went hunting for companies that operate in the IT security space.

You’ve almost undoubtedly heard of Symantec, the multi-billion dollar software company that produces security software for personal computers. In fact, if you’re reading this on a Windows PC, you probably have their anti-virus software downloaded.

But there’s another player in the space that I want to talk about today. The company is FireEye (NASDAQ: FEYE).

FireEye is an enterprise cybersecurity company that provides products and services that protect against advanced cyber threats. The company has more than 5,800 clients in 67 countries, and is considered to be the world’s fastest-growing cyber security firm. The company primarily serves large enterprises in the U.S., but it has plans to expand globally and offer new services for businesses of all sizes.

From a fundamental perspective, FEYE is a speculative play. The only thing attractive about it is its incredible revenue growth from $12 million in 2010 to $714 million in 2016.

While its revenue growth has been impressive, the company has never been profitable—though they do have an objective to be generating positive operating cash flow by the end of the year—but that’s thanks in large part to the company pouring piles of money into research and development. The company is young and small, so spending money on R&D to build toward future growth at the expense of short-term profits shouldn’t be a surprise.

The technical picture looks little better.

Source: TradingView.

FEYE appears to be just about to breakout of falling wedge pattern.

A falling wedge is a bullish pattern that signals that the price of a stock will break upwards through the wedge, moving into an uptrend. You can see the falling wedge pattern here marked by the pink lines.

In a wedge, the price bounces between two trend lines that have bound the price movement. To have a falling wedge, the price movement should test both the resistance and support lines at least twice, and the more times the price tests these lies—especially the resistance line—the higher the quality of the wedge.

In FEYE’s case, the resistance and support lines of the wedge have been tested multiple times, and this week on the news of the WannaCry attack, the price briefly breached (but did not close above) the resistance line.

Once the price does convincingly breakout, or close above, the resistance line, FEYE should begin a new uptrend.

As a rough estimate for a minimum price target once the price does breakout, I’ve looked at the Fibonacci retracement levels of the downtrend that began in mid-2015 that you can see in the chart above and the 38.2% retracement of that fall puts my price estimate at a few cents under $28. From today’s (Friday’s) prices, that’s an 87% gain.

As FireEye is a purely speculative play, it’s up to you to do your due diligence and assess your risk appetite before buying. If you are more aggressive, I’d recommend putting in a buy stop order on FEYE above the resistance line of the falling wedge, or around $16.30. This will ensure that you’ll only buy just after the new uptrend has begun.