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CyberArk CEO On Earnings Guidance: ‘We Don’t Call It A Miss’

Headline breaches drove 2015 cybersecurity spending, but the several-months-long lull in hacks won’t slug CyberArk Software ( CYBR ), company CEO Udi Mokady told IBD Friday, as shares sank after the company gave disappointing Q1 and 2016 earnings guidance late Thursday. CyberArk stock pitched to a 16-month low, toppling as much as 14% Friday. Shares were down 11%, near 32.50, in afternoon trading on the stock market today . Shares of fellow security vendor  FireEye ( FEYE ), which also gave disappointing guidance, were down 5% Friday afternoon, touching an all-time low. But unlike Tableau Software ‘s ( DATA ) grim 2016 outlook last week, CyberArk’s and FireEye’s guidance misses didn’t spiral into a widespread security deluge. IBD’s 25-company Computer Software-Security was down a small fraction Friday afternoon. The group had soared 29% in the first seven months of 2015 on the heels of the Ashley Maddison, Anthem ( ANTM ) and U.S. Office of Personnel Management breaches. Thereafter, lacking high-profile breaches, the group plunged 40.5% in five months. CyberArk stock, too, was tugged down 38% in the back-half of 2015. But, Mokady says, while panic does play into stock prices, it doesn’t touch CyberArk’s sales. “Some vendors … are more driven by emergency spending and you need to be breached in order to dial their number,” he said. “We’re not seeing a change in demand. But we’re also a very prudent company.” Analysts are banking on that prudence. At least five analysts cut their price targets on CyberArk stock Friday, but at least three said the firm’s guidance was conservative. CyberArk Q4, 2015 Beat Estimates For Q4, CyberArk reported 39 cents earnings per share ex items on $51.5 million in sales, up 86% and 42%, respectively, vs. the year-earlier quarter, and topping the consensus model for 20 cents and $43.9 million. License revenue of $33 million accounted for 64% of revenue, Piper Jaffray analyst Andrew Nowinski wrote in a research report. Nowinski cut his price target on CyberArk stock to 55 from 67 but reiterated his overweight rating. “Demand remains very strong, highlighted by a book-to-bill ratio of greater than 1,” he wrote. “They even had some larger deals with oil/gas companies, despite increasing macroeconomic pressure on that sector.” For Q1, CyberArk sees $42.5 million to $43.5 million in sales, topping the consensus for $41.6 million, and up 30% at the midpoint. But the EPS ex items view for 15-16 cents trailed analyst expectations for 17 cents, and would be flat to down 6%. CyberArk guided to $205 million to $207 million in 2016 sales, up 27% at the midpoint and above expectations for $202.3 million. But the EPS view for 83-86 cents would be down 15.5% at the midpoint and missed the consensus model for 91 cents. Mokady said he doesn’t “call that a miss.” “We provided guidance we believe in, and I guess the consensus was different,” he told IBD. “We think the prudent strategy is for us to invest. … That’s been guiding us as we planned our 2016.” Attack Lull Slams Cyberstocks The lull between attacks drew cybersecurity stocks down, PureFunds CEO Andrew Chanin told IBD. Chanin runs the HACK ( HACK ) ETF which includes CyberArk, FireEye, Check Point Software Technologies ( CHKP ), Cisco Systems ( CSCO ) and Fortinet ( FTNT ). Symantec ( SYMC ) stock leads the Top 10. HACK stock was flat Friday afternoon, hurt by CyberArk’s plunge. “That sharp move down today caught me by surprise,” Chanin said, noting CyberArk’s Q4 metrics were largely within expectations. “Investors that got into the space over the past year are probably licking some of their wounds right now, because it has been a very volatile ride. “I don’t think we’ve had a catastrophic attack yet. That could be the next major catalyst for the industry. … Investing is partially emotional.” During last year’s 30-day Cyber Sprint, the federal government acknowledged its shortcomings in privileged account management, CyberArk’s bread-and-butter, Mokady said. Now, credential protection is almost “the basic action.” That spotlight should benefit CyberArk, Summit Research analyst Srini Nandury wrote in a report. Nandury cut his price target on CyberArk stock to 30 from 47 but maintained his hold rating. Nowinski, William Blair analyst Jonathan Ho and Dougherty analyst Catharine Trebnick noted CyberArk’s conservative guidance. Dougherty expects to see “several quarters of beat and raises in 2016.” FireEye Sees Widening Q1 Losses Wall Street offered FireEye stock a caveat Friday as at least five analysts cut their price targets: The company’s transition to a platform service is well underway. For Q4, FireEye reported $184.8 million in sales, up 29%, and a per-share loss of 36 cents, better by a penny vs. the year-earlier loss. Billings of $257 million jumped 21%. Sales were just shy of the consensus model for $185.3 million. Analysts had modeled a per-share loss of 37 cents. And Pacific Crest analyst Rob Owens noted FireEye posted “massive deceleration in billings and revenue.” But Owens rates FireEye stock overweight. FireEye’s 2015 sales jumped 46% year over year to $623 million, a hair short of the consensus model for $623.4 million. But its per-share loss of $1.30 was 67 cents better than the 2014 metric and beat Wall Street views for $1.62. Billings of $797 million grew 35% year over year. Current-quarter sales guidance for $167 million to $177 million, up 37% at the midpoint, was at the low end of analyst expectations for $167.9 million. And FireEye’s per-share loss outlook for 49-53 cents missed Wall Street’s model for 40 cents. For Q1, the company expects $163 million to $183 million in billings, up 14% at the midpoint. FireEye Makes A Platform Play FireEye’s subscription-as-a-service and product platform expansion “could position the company to be a premier facilitator of organizations’ broad cybersecurity needs,” William Blair’s Ho wrote in a report. The transition would put FireEye in rivalry with Palo Alto Networks ( PANW ), another platform peddler. But the shift in demand is a concern, Owens wrote. “We believe FireEye is executing well on becoming a platform play, but the sudden demand shift from physical appliances to cloud-based offerings creates near-term risk,” he wrote. During Q4, product revenue declined 2%, but subscription revenue jumped 57.5%. International sales grew 70%, helping FireEye recover from a Q3 belly flop that caused shares to dive in November. Further into 2016, Ho expects FireEye to balance its investments amid the slowing “reactionary spending” environment.

What Should You Do In The Next Bear Market Rally?

Bull markets have corrections. Specifically, long-term uptrends often hit roadblocks where stock assets may pull back by 10%, 14%, even 19%. Those who may have been holding some cash typically benefit from buying into weakness at significantly lower prices. Bear markets have bear market rallies . Selling pressure typically abates long enough to allow buyers to push stocks higher by 10%, 14%, even 19%. During long-term downtrends, however, attempts at “bargain purchases” can exacerbate portfolio losses and damage psychological resolve . Consider what transpired in 2008. In the first half of the year between March and May, the Dow rallied 11% off its lows from 11,740 to 13,028. The ten weeks of “good vibes” had convinced many people that the worst was behind them. They were wrong. Now look at the epic one-week period from October 27, 2008 through November 4, 2008. The Dow catapulted from 8175 to 9675 for a monster 18% rally. Surely the worst had to be in the rear-view mirror, right? Unfortunately, many buyers who bought in those early days of November later found themselves with assets worth roughly 70 cents on the dollar. (Again, attempts to eat directly out of a bear’s paw can exacerbate overall portfolio loss as well as kill one’s psychological commitment to market-based investing.) Not surprisingly, there was a third head-fake. The Dow’s late November mark of 7550 jumped all the way back up to 9034 by the first trading day of 2009. That’s a 19.6% bear market rally that, ultimately, failed to inspire investor confidence. “But Gary,” you protest. “The Dow and the S&P 500 are currently trading between 13%-14% off of there all-time highs. How do you know this isn’t just another stock market correction in a longer-term uptrend?” I don’t know for sure. Nobody can. I may have made the case for the strong probability that the market had hit the top in the summertime. (Review August’s Market Top? 15 Warning Signs , or July’s 5 Reasons To Lower Your Allocation To Riskier Assets .) Nevertheless, there are no certainties when it comes to percentage moves for stocks, bonds, currencies or commodities. There’s more. If the Fed came to the rescue on a shining white unicorn with QE4 tomorrow, then a bear market for these two indexes might be stopped in its tracks. That is not an endorsement for quantitative easing; rather, it is an acknowledgement that an open-ended 4th iteration of electronic money creation could indeed inflate asset prices yet again. On the flip side, the evidence for why the bear market likely began in May of 2015 is colossal. For example, in bear markets, impressive rallies fail to recapture former high-water marks. Both the S&P 500 and the Dow failed to eclipse respective highs initially set in May – first in July, then again in October. What’s more, the long-term (200-day) moving averages of the indexes began sloping downward in August-September. The failed rallies as well as the negative slope for the Dow Jones Industrials are shown in the chart below. Failed rallies and downward sloping trendlines are only part of the story. In a bull market, investors embrace a wide variety of different risk assets. People go after growth, momentum, small caps, foreign, high yield, MLPs, REITs, IPOs; there is very little in the way of discrimination. As a bull market matures, many gravitate to the safest and largest stocks, eschewing asset groups that they once owned with reckless abandon; they crowd into fewer and fewer companies in fewer and fewer economic sectors. As a bull market transitions to a bear market, falling prices across an array of individual securities and key economic sectors eventually drag down market-cap weighted benchmarks. An observer of U.S. stocks can see the transition from indiscriminate risk-taking to guarded skepticism via breadth indicators. For example, when the bull market is robust, an equal-weighting of stocks in the S&P 500 usually outperforms the market-cap weighted index. As participation in the bull market wanes, and as fewer and fewer corporate shares succeed, equal-weighted proxies typically under-perform their market-cap weighted benchmarks. Not surprisingly, then, by July of 2015, the Guggenheim S&P Equal Weight ETF (NYSEARCA: RSP ) had struggled to make any progress for eight months, even as the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) was close to an all-time record high. Similarly, RSP outperformed SPY right up to April of 2015. The RSP:SPY price ratio demonstrates that it has been in a downtrend ever since. Another measure of breadth is the New York Stock Exchange (NYSE) Advance/Decline (A/D) Line. It measures the extent to which advancing stocks are outpacing declining stocks, and vice versa. When the Dow and the S&P 500 are near their highs, but the A/D Line is falling, participation in the bull market is becoming increasingly narrow. It follows that narrow participation by stocks listed on the NYSE regularly precedes bearish downturns. In July of 2015, the NYSE A/D Line’s 50-day moving average crossed below its 200-day moving average for the first time since the beginning of the euro-zone crisis in 2011. (See Remember July of 2011? The Stock Market’s Advance Decline Line Remembers .) The Fed launched “Operation Twist” to lower longer-term borrowing costs in late September of 2011 and, in October of 2011, the European Central Bank (ECB) provided a series of bailouts to ailing countries and banks in the European Union. Today, there are no plans for extraordinary U.S. central bank stimulus, only “gradual” stimulus removal. The ongoing deterioration in the A/D Line since July increases the likelihood that the bear will officially come out of hibernation. Unfortunately, the problems are not solely technical in nature. There are precious few bright spots for the U.S. economy. Manufacturing has contracted for 4 consecutive months. The services sector (non-manufacturing) is at a 27-month low. Major financial institutions have raised the odds of a U.S. recession to 40%-50%. Even strength in jobs data ignore the declines in both household income and labor force participation . There’s another way to gauge economic weakness versus economic strength. Specifically, one can examine the spread between 10-year U.S. Treasury bond yields and 2-Year Treasury bond yields. The spread tends to widen during expansion; it typically narrows when there is economic distress. The current spread of less than 1 basis point (.99) is the narrowest since 2009. Meanwhile, going into 2015, nearly every traditional measure of valuation (e.g, price-to-earnings P/E, price-to-sales P/S, CAPE PE10, Tobin’s Q, market-cap-to-GDP, etc.) placed stocks at extremely overvalued levels. Going into 2016, very little had changed because corporate earnings had declined for three consecutive quarters and corporate revenue had declined for four consecutive quarters. The contraction in both top-line sales and bottom-line profits may not mean as much when treasury spreads are widening and/or market breadth is strengthening. However, when these market internals are deteriorating, fundamental valuation suddenly starts to matter again. Many of my moderate growth and income clients at Pacific Park Financial, Inc. remain significantly less exposed to stock risk than they had eighteen months earlier. Then, the reward for a typical allocation of 65%-70% stock (e.g., large-cap, mid-cap, small-cap, foreign, etc.) was worthy of the risk. Since that time, a gradual scaling back toward our current allocation of 45%-50% stock – only large-cap U.S. stock – has been decidedly beneficial. We continue to own lower volatility securities via the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ), better balance sheet corporations via the iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) and dividend aristocrats via the SPDR Dividend ETF (NYSEARCA: SDY ). Would I make a tactical decision to lower the current allocation to stock even further? If market internals (e.g., breath, credit spreads, etc.) continue to weaken alongside increasing economic strain, I would use the inevitable bear market rallies to lower the allocation from 45%-50% U.S. stock to 35%-40% U.S. stock. Moreover, I might increase exposure to ETFs that track the FTSE Multi-Asset Stock Hedge Index . The “MASH” Index currently boasts a 20% differential with the S&P 500 over the past 3 months. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.