Why We're Buying These 5 Cybersecurity Stocks Now

Hello and welcome to being exponential. So today we're joined by Jonathan Rose, founder of Masters in Trading and a market veteran with nearly 30 years of experience. He's worked on all the exchanges in Chicago. He's launched Masters in Trading where he helps everyday investors understand the strategies and tools used by institutional traders. He's live every single day 11:00 a.m. Eastern on YouTube. Please make sure to check him out. So today we're going to get his perspective on the current market, specifically cyber security names, and how he approaches them. Okay, guys. Uh, welcome to the channel, Jr. Glad to have you on. >> Thrilled to be here. >> All right, so we are going to talk about five cyber security names. We're going to just dive right into it. So, first up, let's talk about Palo Alto. So, I'd love to get your perspective on it, J.R., and then, of course, yours as well Luke. >> Yeah, sure. So, I I'll I'll start. So, I'll say I approach the market a little bit differently, I would say, than than most. I'm usually just looking for sectors and I love cyber security right now for one the market reaction when the when the overall market goes down most stocks have a beta of one when the market goes down there's no place to hide but right now in the market even when the market gets hit cyber security holds up so on down moves cyber security is holding up and on up moves cyber security is outperforming so once I have a feeling like that for a sector then I'm going to dive into some individual stocks. And so today we're going to go over five of those. Starting with Palo Alto. So Palo Alto sells many kinds of securities in one package. So a company could buy everything from one place. Uh it's just bought Cyber Arc for about $25 billion. Sales are expected to grow 23% per year. It's it's an expensive stock, but cyber security stocks right now are trading at a premium and they have a tailwind behind them. So right now I think it hit a record of about 432 um about 30 days ago. It's now 15% 18% discounted from those highs. Palo Alto is one of the stocks that I like as far as leading the charge in cyber security. >> Excellent. And Luke, what's your uh take on PaloAlto? >> Yeah, I mean I like Palo Alto a lot, right? like AI cyber is a total hot topic right now. It's definitely a place to be. Uh it does zigg or at least recently it has zigged when the typical AI trade or that core AI infiltrate zags which is nice to have. It's kind of been like energy in that sense. Um the the only concern that I think I have with with the broader space is something that JR brought up which is is valuation. I mean these stocks are very expensive. Um they've been priced for that that cyber tale when when I look at something like Palo Alto Networks which we we own Palo Alto in our model portfolios. We've owned it for a while but we didn't get in at you know 84 times forward earnings now which is you know bordering fiveyear highs in fact all-time highs pretty much on that on that valuation. So to me, I like the cyber names, but I question the entry point in November 26 after they've had a big run. Multiples are now at 5 10 year highs. I mean and I'm looking at at PaloAlto and I mean you look at 28 29 30 you got 14% revenue growth in 28 14 and 29 7 and 30 you got 15 to 25% EPS growth per year so call it a 20% EPS kagger and then you're trading at uh again 83 84 times forward earnings so it's like really really rich now that's not a reason not to buy but that to me is the hesitation on like short-term term entry point. No knock against the long-term thesis. Again, we own PaloAlto in our model portfolio, so we're very bullish on it. But that's kind of like my uh word of caution on some of these stocks at that the current moment. >> Luke, are you are you taking some money off the table when when you say the stock's expensive like this? >> No, I'm not I'm not at all. I'm not taking money off the table. Palo Alto is a name that we own. We own a few others in the space. Uh not taking money off the table. I think there's a difference between a selling time and a buying time. There's a window in between. Um, and I think the way I look at it is at least with PaloAlto, I think we're in that window um in between. I I don't think it's like the the most attractive entry point. I also don't think it's a good time to sell. I think it's time to kind of let it let it do what it's going to do and then maybe on a pullback to the 100 day or below the 100 day or something like that is when you want to really get aggressive on it. So that's that's how I'm I'm looking at it right now with with Palo Alto specifically. I think there are some other names with different setups in the sector, but that's that's my take on Palo Alto. But fundamentally looking out like one to three years, I think PaloAlto is maybe the best way to play it because I think risk adjusted it has the best return profile. Let me set the table then a little bit because I'm going to share, you know, coming on here. We didn't get a chance to talk much before this talk talking about five different stocks. We're long one in our model portfolio. So out of these I'm >> I'm going to share one of them that we love longs. The other ones I'm bullish in the space. Now I think what a lot of investors get caught up in and why we look at the sectors is the sector is expected to grow one, three, five, 10 years. I always joke around with my listeners. I'm I'm live every single day. I got the questions up. Everyone's asking questions. It's very interactive. But I always picture the board coming in and you're part of a public company and the board saying AI is looking really scary. What are we doing for security and how can companies not be investing handover fist and making sure that they're covered in the cyber security industry. So, as an industry, we are incredibly bullish. I think that once you pick one of these names because of the volatility, you can't really get scared out of the up and down. You have to be a willer willing to buy in. So, whenever we share a trade, we're also willing to trunch in a couple of different times because >> we're we're not going to buy the low. We're not going to sell the high, but we just want to get on the right side of the tide. >> Yeah, I think that's a great way to look at at at cyber. I mean, you're right. When you read all these headlines, I mean, optics matter, right? People can say, "Oh, it's just this hack. It's just that hack." But optics matter. And you're right. Board members are going to meet and they're going to be like, "Dude, we got to we we got to increase this budget. Like, we got to make we [laughter] >> a thous%." >> And then you get stuff like I mean, I know it's not even really related to AI, but you get stuff like the Binance stuff and it's like even so even non AI cyber risks are are rising too, right? So it's like everything is pointing towards board meetings. Uh a big talking point in those board meetings being we need to increase increase the cyber budget. So I'm I'm totally with you. I I think what happens here with a lot of these names like PaloAlto is despite the rich multiples you get really big raises in the EPS estimates that I think you look at 27 28 29 that's what they're valued off of. you're going to get those estimates rising, you know, 10% every quarter. And that's going to be enough ump to get a stock at 83 times forward earnings to still work for you, which again is why we are not not selling PaloAlto in our mono portfolios at all. >> Excellent. So guys, uh so last week we saw one of the biggest dips in the market. So JR, does your market dip resistance for cyber security? Did it hold up during that sector? Google, you know, reportedly lost half a trillion dollars in value. >> Everything pulled back. A lot of that pulled back, the majority happened in the last couple of hours of trade. The last couple of hours of trade, first it's the end of the day on a on a Friday. >> Being a professional trader for 30 years, there's not many people in the office at the end of the day on a Friday. It's the end of the week. It was the end of the month as well. So, we were looking the NASDAQ came right back down to August lows. It was also it hit uh June lows which was the same low and now October is the same low as that and we were right back up come morning today. So, yeah, they fell but everything is bouncing today. I'd be really surprised if the market followed through to the downside this week through the low of Friday. Gotcha. All right. So, let's move on to the next stock here, gentlemen. That's Octa, OKTA. So, they reported a revenue growth of 11% in Q2. Uh, their primary uh sales point is managing of AI agents. So, what's your take on that particular company, JR and uh Luke? >> I like Oxa. Many pe and again, we don't own Oxa. It's part of the basket of five stocks that that I like. I'll get to my favorite one. Uh, so OXA checks who you are when you log in. It now does the same for AI programs and many people thought that AI would be hurting OXTA, but instead I think it's up 120% for the year. Sales are growing 9 to 10%. Most of the AI money hasn't really shown up. They do report uh in the December expiration cycle, which is kind of unique. Most most stocks are reporting in the in the November expiration cycle. So earnings will definitely tell. But again, it's caught up in the same valuation as many of these names in the space. And these valuations are so high again because of the expected growth of the entire industry. >> Yeah, I I like a maybe I've talking about like entry points maybe a little bit more than uh PaloAlto right here. Though I think the long term may be a little bit uh less attractive just because of size. But if I kind of look at the estimates on this one, I mean, this is a a mid- teens, low teens revenue grower with some Ebida margin expansion. So maybe a mid- teens ebida grower, mid- teens EPS grower. Uh so a very similar growth profile to to PaloAlto, but it's only trading at at 46 times forward earnings and and 33 times forward Ebida, which is much cheaper, marketkedly cheaper uh than where PaloAlto is. Not to mention with its size, I mean the market cap here is only uh 34.5 billion. Enterprise value $ 32.3 billion. Uh with that size, I think there's a lot more room for the estimates to move meaningfully higher. Right? When you're super big, estimates can only move so high, but when you're at this size, this kind of I know it's, you know, midcapish for cyber. Uh I think that that's that's a good place to be. Um right now, uh the charts coming right into the 50-day moving average. that's been a level that's held ever since mostly held ever since uh May of this year or actually uh yeah May of this year I think it holds again. So I think Octa right here around 195 uh 198 is is the tick today. I think that's like a pretty good entry point on on the stock. Not to mention it's about a 15% pullback from the highs which is pretty consistent with all the pullbacks it's had since May. So, there's a lot of signals here to tell me, hey, maybe this is a good time to a good entry point on Octa, as well as, you know, kind of the long-term growth story that's still intact here. So, I I like Octa quite a bit here, actually. >> Excellent. Do you agree about the entry point valuation there, JR? >> I'm going to defer to Luke on on Oxa. I don't have a dog in dog in the fight. >> Fair enough. All right. So, uh let's move on to the next one. That's going to be rubric. uh you know traditional data protection and cyber resilience they exceeded their guidance uh they're prompting management to raise its fool your outlook so what's your outlook on rubric uh JR >> okay so I'm an options trader and so the best thing that I can do for my audience is find names that could that can produce exponential gains so Rubric backs up a company's data if hackers get in Rubric helps the company recovers quickly there are going to be hacks. Rubric is booked up. The fastest grower of the five that I'm going to share. Sales grew 38% last quarter to about 427 million. It's just starting to make money. It's expensive, but I presented Luke presented as well at the Stainsbury Alliance conference and we were asked to share our favorite name in the space for the next year. And out of all the companies, I absolutely love Rubric. I shared Rubric. It was trading about 108 when we did the Stainsbury conference about one month ago. It traded up to about 135. It just recently pulled back. I think today again in the volatility it might have pulled back to 115. It's 120 last. But Rubric is a name that I absolutely love. We're also seeing out of all five names that I'm sharing the most options flow to the call side out of any of these names. And I've just seen one way buying for Rubric. And more than valuations for me, I'm looking at money flow. I'm a huge believer, and this is what we did at the floor of the options exchange. When I first got down there, I looked at everybody as these genius traders, and it took me a while to learn what they were doing, but they were just sitting around and waiting. and they're waiting for the biggest players in the room to make really bigized bets relative to a company's market size. And and that's where I'm seeing the biggest bets in cyber security rel relative to a company's market cap ticker rubric seeing a ton of out of the money call buying one year out on that 145 strike. And right now that stock's trading about 120. >> Yeah, I I like Rubric too. I think Rubric I mean it may be the best positioned of all the cyber names for the AI security wave. Uh it's got a direct agent product. It's growing really quickly like JR said. Um ARR grew I mean the numbers here are great. AR grew 33% uh last quarter. Net retention was above 119%. Uh they're throwing off lots of free cash flow which is really big in today's market. You're seeing a big divergence in all sectors, not just cyber, uh between companies that are throwing off cash flow and ones that are burning cash flow. The AI financing fears have brought that front and center. Uh Rubric is a big free cash flow generator. So, a lot a lot of the cyber names, but um Rubric is really good relative to their market cap. I mean, 332 uh million in free cash flow this year versus a $24.8 billion enterprise value. That's pretty attractive. Um, looking at the growth profile again, 28% growth this year, 22 on the top line next year, 21 year after that. Gross margins high and stable at 81% EBIT dot margins. That's the most attractive thing about this company is they are a high gross margin business 80%. With a low EBIDA margin profile, 6% expected this year, growing 20% plus on the top line. That just screams scalability. So that means they can go from 6% IBIDA to a lot of the other bigger players in the space operate at high teens to low 20s EBA. So you have 15 points of EVA margin expansion more or less over the next several years giving this the biggest of the names we talked about so far uh EVA growth profile over the next few years. and the valuation. Yes, it's rich, but again, I don't think it's that rich when you're trading at 12x 13x forward revenues for a company that can get Ebida from I mean, look at the estimates 105 million this year up towards and above 500 million within 3 to four years. So, I think this is a fantastic uh company. I think the stock is attractive. It's a little bit overbought, but it's coming in now. And so, I think the entry is is pretty attractive on on Rubric here and now. I I think it's a great great company and a great great stock >> for for perspective as well. I I I manage four portfolios, four model portfolios. All of those together. I'm long less than 20 stocks. So, we're not holding a ton of names. I'm holding less than 20. And this is one of my favorite holdings. So, this is an important name for us. But also once again we're following the money and the money through whether it's through funds, institutions, endowments is setting up in rubric. And so what I'm always looking for is names that are off the beaten path a little bit. Not necessarily trading names that are a $500 billion market cap. We're looking for names that are a $50 billion market cap, a 20 billion market cap, a $5 billion market cap because that's where, first of all, I can really add value to my community because we're looking for those plays where you can buy out of the money calls and potentially make these exponential gains. And Rubric absolutely fits that mold. >> What one thing I'll add there is I think talking about entry point, um I just kind of drew my chart on it. If I kind of draw that channel, we hit the top side of the channel very recently and we're pulling back now. You got the 50-day at at 110. We have negative crossovers on MACD momentum. So, I think that this probably comes into 105 to 110 and that's probably a range that you'd want to want to buy this one with both hands. I think that 105 to 110 range. I do think we come into that and I think that's the time to really back up the truck. So, that's my quick technical view on on Rubric. >> Roger that. So now you did mention you were long on this uh particular stock Rubric. Do you have any bearish worries that uh larger cyber security platforms could bundle up some of what Rubric is doing back up and recovery in the broader enterprise contracts or is that more of a long-term uh concern versus you know for now? >> Rubric is such a baby I think they would sooner get bought than that they would have competitors. So I think that would be great. I think for somebody to come in and inquire them and gobble them up, I wouldn't be surprised if that happens. But I with their free cash flow, with the amount of money that they're making, I I think that's more of a likelihood play. >> Roger that. Okay. Uh let's move on to the fourth in the bunch, Crowd Strike. One of the uh the bigger names. They recorded a net new ARR in August. More recently, on November 2nd, it announced an expanded partnership with Coreweave, the protect AI cloud workloads. Uh, so how do we feel about that one, guys? I could tell you that I'm not bullish. Coreweave, put out two months ago, I put out two names in the space that I do not like at all. And we were we still are short Oracle in the model portfolio. And Oracle's been getting getting hit. But Coreave, since I shared shorting Corewave at 120, Corewave last trading is about $55. So, uh, Cororeweave doesn't make me too excited about CrowdStrike, but again, when we were talking about cyber security, talking about five different names, it's one of the names. Sure, it's a big player in the space, protects computers and phones from hackers, then it sells customers more security tools over time. Sales were 1.47 47 billion last quarter, up about 26% from a year ago. But again, it's an expensive stock. This has got really expensive multiples. I wouldn't really chase it up here. Uh maybe on a big strong pullback to get into one of the leaders in the space, but if I could own any of these five, I'd go back to the name that I just shared. I'd lean on Rubric a bit more. But curious what your thoughts are, Luke, on Crowdstrike. I like crowd strike. I I'm not gonna chase it. I don't want to chase cyber here and now. I think we come in a few points and then buy that dip and and buy on the rebound. But um in the space of cyber, I like Rubric a lot. I like Palo Alto a lot. But I think maybe my favorite play is going to be Crowd Strike. And that's because if I look at its growth profile, there is absolutely no deterioration in the there has been no deterioration for years and there is no deterioration projected over the next several years. This is a steady consistent reliable 20% compounded revenue grower year after year after year after year. And if you look at the estimates, it goes 25 next year, 23, 22, 24, 23. So out 5 years, we're still just 20 to 25% on the top line. Margins are super high at 80%, EPA is going from 30 to 33%. I mean, this is like the most reliable big-time grower in the space. You can count on it to produce 20% plus revenue and 30% plus EPS pretty much every single darn year. Now, yes, you're paying up for it right now at 164 times forward earnings, which is seems ridiculous. Historical average over the last two years is 110. So, you're paying a 50% premium over that average. I get that. But that's happening across the space because of this expectation that estimates will rise dramatically as boards get together and increase their um uh defense cyber spending in 2027 and everything gets, you know, much better for these companies from an operating backdrop. And that's why if you look at estimates on Crowd Strike, they continue to rise dramatically. Um, this is a stock that has consistently defended its 50-day moving average since the spring. I think it continues to defend it. We're at 250 right now. 50 days at 240. 240 to 250 seems like a great entry to me on on Crowd Strike. So, I really like this name quite a bit. The the headwind is that it's it's a $250 billion company. Um, so like how much upside does it really have? Not a ton, but I think you get good upside with mitigated downside risk because of how large it is and its history, its operating history is so robust. >> I was just checking the 50-day moving average and it looks like it's coming down to kiss it right now. So, there's another uh another another good reason. So, I think also a good way to look at these moving averages because we could all look at like the 30-day moving average, the 50-day, the 70-day, the 90-day, all these different moving averages. look at how a stock has behaved against that moving average historically. So, just looking at crowd strike and looking at that 50-day moving average, does it respect it or does it not? And it absolutely does. Every single time it gets down there, it touches it, it bounces off. So, I think that's what's most important about these moving averages. So, I do absolutely agree. And for somebody looking to get in, probably when it comes down to kiss it, it's a pretty good time to get involved. Fantastic. All right. Uh, you guys came came back together at the end. I thought there was a bit of contention there at the start. [laughter] >> All right. So, uh, last up on the list, but certainly not least, let's talk about Zcaler. So, they reported 25% revenue growth in fiscal Q4 and reaffirmed its forward guidance for 2027. So, uh, let's, uh, discuss Zcaler. Yeah, another volatile name. I mean, what Zcale was trading, it got up to 333 and and then in 2026 it got down to 128 and since then it's recovered to a high of 250. So, another very very volatile name, but it handles about 750 billion checks a day. Trust no one by default. every person device and AI program must prove who is who it is before getting in. It's definitely a product that people uh will need uh something that I'm not invested in. I'm always uh thinking when a stock is this volatile, who knows where it's really valued at. You just want to make sure that if you're going to get involved, you don't want to chase it. You want to get involved when it does pull back because this is a roller coaster ride. Yeah, it's a volatile stock, right? I mean, it's it's bounced between 100 basically and 350 for five years now. Um, we had that postcoavid boom and then it's been a yo-yo ever since. Uh, but right now I think it's yo-yoing up. Um, and it is yo-yoing up and I think the yo-yo up does continue and I think this $230 stock can and will make a run for those 350 highs. Uh, I think it I think it does that. I mean if you look at the so you got a few things obviously one we talked about sector this is the right sector to be in two valuation people are really in tune to valuation right now because of interest rates and because of financing fears and all that stuff the numbers we've thrown out on these cyber stocks are massive multiples this one's 45 times forward earnings 31 time forward I even thought that's almost as cheap as it gets in the cyber space and you look at the growth profile and it's a mid to upper teens compounded revenue grower with upside uh EBA margin expansion drivers and so maybe a low 20s mid20s iba grower at a 30 times forward multiple like that's a peg of almost one. You never see a peg of one in this space, right? the price to earnings growth ratios in in cyber are always like five or eight or nine or 10 or even more because you're paying a premium for that reliability. You're paying a premium for the fact that everybody's got to pay for cyber security every single year in their budgets. Um you're paying a premium for that for the high margins of the businesses, the big cash flows of the businesses, etc., etc. So when you get something that's like Zcaler that's at a a pay ratio of almost one, you're like, "Wow, this is that's a pretty attractive setup." And so I think yes this is a volatile one super long term I have less confidence in this than like a crowd strike or a PaloAlto but over the next 12 months to play the space when I look at the chart I look at the valuation I look at the numbers look at the estimates that are just kind of spiking higher right now I think this one's got a lot of runway to go from 230 back up to 350 I think it kisses 350 in the next 6 months I think that's what this stock does so uh very volatile but I think the volatility is going to work in favor of the bulls uh for the next few months at least. >> I am blown away by the option skew in Zcaler going out to January 2027. So option skew is just the price of the calls relative to the puts and there is real serious activity 320 340 with you know the options market is pricing in a 20% probability that ZScaler can trade up to 320 in the next 74 days. So right now the stock's at 230, 320 is $90 higher. And right now like the market is pricing in a 20% likelihood of that happening. So ZS the options market is for sure pricing it to go up. I can't believe how much it's that the tails are pricing that it this thing could really move. So to interpret that, it's not just saying that the stock could go up. It's saying that if it does go up, it's not gonna it's not going to creep up. It's gonna really go up. So, that's kind of cool to see. >> Yeah, it's pretty incredible. So, we've gotten through our list of stocks. I would just like for you guys to kind of reaffirm one, your favorite, and then two, your least favorite, and you know, uh why if possible? Let's start with you J.R. I can just go to my favorite. My favorite is Rubric. That's the one that I know most. And out of all these names, I'm looking a lot at institutional buying. I'm looking where that where that big options flow is going. And I'm seeing it in in Rubric. Uh I'm pretty impressed looking at Zcaler with the option skew. Options when when you option skew, you can always look at the strike. So, if the stock's trading 250, you can look $50 higher and just look at the price of the calls and look $50 lower and look at the price of the puts. And when you see calls double or triple the price of the puts, the options market is skewed for that name to go higher. So, I'm pretty impressed just as we talk and checking out that market that the upside for Zeller looks interesting. And uh that just came to my attention from listening to Luke talk about it. As far as the name that I'm most bearish about, I don't really have one. I'm bullish on the space. I think that if this sector pulls back, I think over the long term, you want exposure to cyber security. I'm just giving you the names that I favor the most. >> Yeah, I'm going to kind of double on that. Like I don't I don't think there's a name here to be, especially among the ones we discussed, to be particularly bearish on. Um, but there are a few that I think stand out more in terms of, you know, reasons to be excited. Number one for me is going to be, well, I think I got two. One is if your stability play and one is your upside play. Your stability play is going to be Crowd Strike. Again, we kind of went over that. Crowd Strike has I mean, it's got the most robust operating history. You can count on it for 20% plus revenue growth. You can count on it for 30% plus EPS growth. Uh, the analyst community is behind it. like this is a great stock. This is a great compounder. Um, in terms of upside, it's Zcaler. I mean, I didn't even know about the option skew that JR just threw out there, but that just makes me even more bullish on an upside move here. Uh, but it makes sense. It tracks because again, this is you have a P, you have a PEG ratio of one, right? You have a 30x forward multiple and then a, you know, maybe mid20s growth profile over the next several years. That's unheard of in this space. The chart says that when it goes, it goes. and then when it goes down, it goes down. But I think again, we're we're on the yo-yo up right now. And I think this is a name that could have a lot of alpha, but it it's not it's not the lowest risk name. It's the highest risk name of the ones we've discussed. So, if you're looking for that upside torque, Zcaler is the way to go. If you're looking for kind of stability and steady eddi, uh Crowd Strike's the way to go. So, those are my two faves. >> Yeah, I love it. Resilience is the signal right Luke? >> That is right. >> Okay, I think that's a great place to wrap the episode. Can I get any final thoughts uh from uh both of you guys? JR, >> my final thought is I love what you guys are doing. I will I I I try to catch all the podcasts. I hope not to miss any. And for those who are interested, we're live every day 11:00 a.m. Eastern time. It's 100% free. We get everybody in the chat. Everyone says good morning and then we get off to to enjoy the day. It's a great kickoff to the day. So, I'd love to see you in the chat. >> All right. Make sure you guys check out JR on Masters in Trading. We're going to put a link below. Uh educational. So if you if some of the options information went over your head, great educational platform. Make sure to go follow and check them out. That's it from me and Luke for being an exponential signing off. Take care. >> [music]