Equity markets started out 2015 on a ho-hum note, but increasing fears around instability in China and the Federal Reserve’s timeline for raising rates brought about violent swings. As the Fed moves fully into a tightening stance in 2016, this level of volatility may continue during the next 12 months. However, there are still several sectors that are showing great promise in the new year. Within these hotly coveted industries we want to focus on companies that have strong fundamental outlooks, positive revisions to their earning per share (EPS) and revenue expectations, price momentum and innovative new products.
While cybersecurity has been running up for the last two years, increased expectations for cyber attacks in 2016 make security-related products more crucial than ever before. McAfee Labs 2016 Threat Predictions reports that the number and types of cyber attacks in 2016 will run the gamut from ransomware, integrity attacks and critical infrastructure attacks, with wearables and automobiles being likely attack vectors as well. At the time this went to press, the data was not in for 2015, but in 2014 companies reported a 48% year-over-year increase in attacks. It is expected that 2015 will show another double-digit increase, with that trend only continuing into 2016.
Palo Alto Networks (PANW) is a pioneer in the industry and has been crushing competitors such as FireEye (FEYE) and Fortinet (FTNT). Its EPS results have surpassed the Estimize consensus in the last three quarters, leading to triple-digit year-over-year growth (see “Secure profits,” below). The revenue pattern is even more impressive, with the company beating estimates for the last 10 quarters while keeping growth around the 50% mark. By the end of its 2015 fiscal year, Palo Alto boasted more than 26,000 customers.
The recent launch of Aperture, a security offering for cloud service providers such as Dropbox and Google Drive, comes with enormous growth opportunities as the number of cloud-based apps is forecasted to grow 30% in the next three years.
Imperva (IMPV) is another name on our list, although it is less well-known. Estimize likes Imperva, which has easily beaten estimates for the last three quarters. Customer base growth also has been on fire, now touting 4,100+ customers in roughly 90 countries. With a market cap of roughly $2 billion, Imperva is potentially an attractive acquisition target. The recent acquisition momentum in cybersecurity has caused an increase in valuations and makes it one of the hottest sectors for M&A.
Another major theme this year is enterprise technology. The U.S. economy is surging and companies are investing in the cloud and in their own growth. There are so many in the space offering a variety of tools and products that are becoming critical for business efficiency.
Logmein (LOGM) specializes in software that helps individuals and businesses securely connect to their workplace. The company has beaten the Estimize consensus for EPS in five of the last six quarters, while results on the revenue front have been more muted. Its Join.me product was ranked the #1 web conferencing solution in a 2015 survey conducted by Satmetrix. LOGM has a market capitalization of $1.75 billion, which means that with its solid fundamental base it has a lot of room to grow. It’s also an obvious takeout target by someone like Salesforce (CRM).
Speaking of Salesforce, our next pick is Zendesk (ZEN), a competitor in the customer data management space that is taking on the big guys. Since going public in May 2014, the company has had a laser focus on growing revenues, resulting in top-line growth of 63%+ during the last four quarters. While still unprofitable, EPS has been trending in the right direction and the company regularly beats expectations. As of October, ZEN had more than 64,000 customers, up from 50,000 earlier in the year, and the percentage of clients with 100 or more seats accounted for 30% of recurring revenue. Recent acquisitions such as We Are Cloud strengthen its portfolio and makes it a formidable contender against similar cloud analytics products from Salesforce and Amazon (AMZN).
Yes, Star Wars is an investment idea for 2016.
Box office experts are predicting that “Star Wars: The Force Awakens” could be one of the top three films of all time, potentially grossing close to $2 billion worldwide. This, of course, is great for companies that are tied to the movie (see “Star Wars winners,” below).
The most obvious is Disney (DIS), which is producing the film, and has seen EPS expectations increase since tickets went on sale. The media giant posted robust results all throughout 2015 and the outlook for 2016 suggests that will continue. Electronic Arts (EA) is another company banking on the success of the film as the maker of the videogame Star Wars: Battlefront. Although Gamestop (GME) reported that initial sales of the game underperformed, EA is expecting revenues to hit a fever pitch with the release of the film, and that 13 million copies will be sold by March 2016. Last on this list is Hasbro (HAS), which released a collection of Star Wars-related merchandise in November. Demand has been so high for the toys that the company suffered from a lack of inventory after the initial release, with sales exceeding even their highest estimates.