Top Picks 2016: Stephen Quickel Picks Palo Alto Networks

01/28/2016 7:00 am EST

Focus: STOCKS

Stephen Quickel

Editor, US Investment Report

 

Even if a stock appears overpriced, you may feel better knowing that it is accepted by investors for a demonstrated record of rapid and consistent growth, suggests Stephen Quickel, editor of US Investment Report.

Examples are such top-performing, high valuation stocks as Amazon.Com (AMZN), Facebook (FB), and Netflix (NFLX).

For our Top Pick for speculative investing, we are adding Palo Alto Networks (PANW) to that elite list of stocks.

In this case, you should consider buying the shares even though their P/E and PEG ratios are virtually meaningless.

I admit that I balked when PANW fist flashed onto my radar screen a few years ago. Today it trades at 100 times forward earnings (vs. 15x for the S&P 500 universe).

Palo Alto is reckoned as the early leader in cyber-security, a market which third parties have described as "white hot.”

Its PEG ratio, which measures its P/E relative to its five-year earnings growth rate, is around 2.40. To put that into perspective, I regard 1.00 an ideal PEG, representing a one-to-one parity between the P/E and the rate of long-term earnings growth.

I rarely recommend a stock with a 1.25 or higher PEG. My exceptions are the aforementioned Facebook, Amazon, and Netflix…and now Palo Alto Networks.

This nine-year-old company has won its spurs in the cyber-security marketplace, where in 2015 it upped its revenues from $928 million to $1.3 billion, and is projected to gross around $1.8 billion in 2016.

On those rapidly rising revenues PANW is expected to grow earnings by 42% a year. That's the collective opinion of 33 Wall Street analysts covering the stock, some 25 of whom rate it a Strong Buy.

Their bottom-line earnings estimate was $1.70 per share for 2015 (vs. 86 cents in 2014) and is $2.70 for 2016. The stock sells at 100 times 2015 earnings and at 66 times the 2016 analyst projection.

So why would we buy this stock? Sky-high valuation ratios notwithstanding, its stock rose 45% during the lousy 2015 stock market.

How come? Because businesses and consumers are scared out of their wits by cyber-security hacking, identity theft, and anything smacking of terrorist activity.

In addition, PANW has carved out a strong technological leadership position in its brief existence.

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