It's been a frustrating year overall, especially for us Bleeding Heart Liberals, who lost the Obamas and the Clintons this year. We also may be losing the 8-year bull market, which did jump off the table to give us a last-minute gain for the year but already the repercussions of the Trump Coup are already being felt as the US and Russia have now expelled 35 of each other's diplomats as Cold War II begins.
We talked about investing in our two favorite military contractors last week, so I won't get into that again. Security companies are interesting. In fact, PSW Investments has an early stage investment (10%) in Aerobyte, who provide edge to edge encryption security for IOT devices – something that is becoming a major concern in this age of Russian hacking. We're into early stage companies because, CLEARLY, the current offerings are not doing enough to secure their clients. Just this morning I got a note from Open Table, warning me that the Yahoo hack has likely compromised my password and suggesting I change it.
Having state of the art security solutions is one of the things that will set companies apart in the late part of this decade. All of this was predicted back in the 80s by William Gibson, who wrote some great novels about a World where the best Corporations had the best firewalls and those Corporations, of course, controlled the very wired World, where income disparity had run wild. Sound familiar?
“My first impulse, when presented with any spanking-new piece of computer hardware, is to imagine how it will look in ten years’ time, gathering dust under a card table in a thrift shop.” ? William Gibson, Distrust That Particular Flavor
We know that's true. I often tell the story of my first big hardware sale when I worked in computers, it was the late 80s and I sold a 300 megabyte (0.3Gb) hard drive to a doctor for $25,000. Just the drive, the server was a fortune too. And $25,000 was money back then! 30 years later, it doesn't even sound real to people under 40.
That's how fast technology changes. A 3 Terabyte Drive is $125 at Amazon now – that's 10,000 times the size of the one I sold for $25,000 (200 times the price) so call it a 2,000,000% improvement in 30 years. This is a fairly consistent theme in electronics, governed by Moore's Law but few people consider it applies to security as well. You can buy the best-secured system in 2017 and by 2020 it will be hopelessly outgunned. What companies tend to forget is that doesn't happen all at once – within 6 months of buying the system, you are probably going to lose to a determined hacker with newer equipment. Within 18 months, it's a virtual certainty. It takes them 18 months just to decide to upgrade their systems – they pretty much can't win.
That's good news for hardware security, as there's a constant need for new models but the real money is in software-adaptive security solutions that can be constantly updated along with monitoring solutions that keep the customer aware of their security conditions. We still like IBM (now a business partner with Aerobyte) in this space as AI-driven security is the next frontier. Last year, (IBM) was going to be our 2016 Trade of the Year but it lost out at the last minute to (UNG). At the time (12/14), our play was:
IBM is our 2016 Stock of the Year and it's back at the $135 line. Rather than buying the stock, you can sell the 2018 $110 put for $10 and that then obligates you to own IBM at net $100, which is 22% off the current price. All IBM has to do is hold $110 and you make $10 but I'd pair it with the more aggressive 2018 $125 calls ($19.50), offset by the sale of the $150 calls ($9) for net $10.50.
Overall, on this trade, your net cash outlay is just $50 per contract set and, at $150 in Jan of 2018, you would collect $2,500 per contract set for a gain of 49x the cash you put in (4,900%). There is, of course, a margin requirement as you are promising to buy IBM for $110 if it goes the other way, probably about $1,000 per contract set so your return on margin is "just" 250% in two years. Still, for many reasons, I think IBM will be well over that mark at the end of 2017.
We're halfway through to 2018 but already the short 2018 $110 puts have fallen to $2.35 and the $125/150 bull call spread is now $20.75 for net $20.25 (4,050%) profit in 12 months, returning $2,025 for each 0.50 cash invested (margin is $1,100 per contract). It's still a good trade but we don't trust the market and we can do much better things with $20,250 than wait 12 more months just to make (yawn) $4,750 (23%) more – so another good candidate for CASH!!!
Aerobyte isn't public yet and IBM is a bit high in the channel but I do like the Cyber Security ETF (HACK). FireEye (FEYE) had a disastrous year but I like the overall company, so maybe worth a toss and Palo Alto Networks (PANW) are back at the lows and are also good for a poke at the future. None are traditional value plays but we can turn them into better values with options.
For FEYE, our trade idea would be:
- Sell 10 FEYE 2019 $10 puts for $2.45 ($2,450)
- Buy 10 FEYE 2019 $10 calls for $4.70 ($4,700)
- Sell 10 FEYE 2019 $17 calls for $2.15 ($2,150)
That's net $100 on the potential $7,000 spread that's starting out $1,800 in the money, so a better than 15% cushion before you lose. Upside potential is $6,900 and the margin requirement (you are obligated to buy 1,000 shares of FEYE for $10) is $1,750 so a very margin-efficient trade. If you were reading the above IBM trade and wondering why you miss good trades like that yet you read this idea and ignore it – well, that's why!
Of course, you wouldn't miss anything if you subscribed to www.PhilStockWorld.com and we will go over other 2017 cybersecurity ideas in our live Member Chat Room this morning, as well as other Member-exclusive ideas for 2017. I will be on FaceBook Live, over at the Nasdaq on Tuesday, morning – Monday's a market holiday, so enjoy!
Wishing you and your family a happy, healthy and wealthy 2017,
– Phil
