Internet Security is for Losers (CHKP)

Check Point Software Technologies Ltd. (NASDAQ:CHKP) operates in that dark web space between security and surveillance.

The Israeli company was the first to introduce the “firewall” to the online security industry and has since been a leader in cloud security efforts for any and all who operate in that realm.

But nobody seems to care…

And that’s evident in the stock’s price action over the past six months.

But before we get there, have a gander at the company’s fundamentals –

• First, P/E is 19.55 and Forward P/E is 14.81 – that is, we either get a massive earnings boost in the next twelve months just to maintain the current price, or price declines by roughly 25% to keep in line with the current earnings picture.  Either way, we’re looking at some bad prospects.
• Dividend Yield is Zilch.
• Price to Book is a pot-bellied 4.92, and
• EPS came in this year at an entirely unremarkable 2.00%.
• The strongest aspect of the stock is that it’s 24.80% insider-owned, and that single fact could make or break our effort today.

More on that in a moment.

In the meantime, take a good look below at the support line on the descending triangle that we’ve highlighted.

It’s unclear who’s doing the buying every time price drops to the 116 range; as mentioned, insiders own a full quarter of the shares, while institutional investors account for another 71%.

That leaves just 4% of the float in the hands of the public, and that, in turn, raises doubts about who exactly would have an interest in moving the stock lower from here.

Hmm…

Have a look at the chart –

Technically, you can see…

1. That RSI and MACD are beginning to modulate about their respective mid-way waterlines (in green). Generally, this sort of action precedes a volatility breakout, which, in this case, we expect to be downward.
2. Price, too, is compressing in a descending triangle formation (in red) with support at 116.  If and when we get a break below that level, we should see a veritable juggernaut of selling, at least to the 110 mark.
3. At the same time, volumes are fading (in black), and…
4. All the Moving Averages have turned lower (in blue), effectively capping price at 122 (and falling).

And it’s for all the foregoing, that we’re now recommending the following action be taken against the programming schlemazels from Tel Aviv –

A Jew and His Money recommends you consider selling the CHKP October 21^st 115/120 CALL spread* for $2.20 (5.80/3.60) and buying the CHKP October 21^st 120/115 PUT spread** for $2.50 (5.60/3.10).  Total debit on the operation is $0.30.

[*Sell the 115 CALL and buy the 120 CALL.  **Buy the 120 PUT and sell the 115 PUT.]

Rationale: for $0.30 we get a chance to take home $4.70 (1567%) – on a relatively small move.

Breakeven on the trade arrives at $117.20, just $0.41 (three tenths of one percent) below the current market price.

With a decline of just 2.2% we take home the full $4.70.

And that looks just fine from here.

And from Heaven on high…?

We’ll leave that to the Al-mighty.

May He judge us favorably this year and in all coming years.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew