Fortinet Inc (NASDAQ:FTNT) and Palo Alto Networks Inc (NYSE:PANW) are two IT-Security stocks that caught the attention of hedge funds of late.
California-based Palo Alto Networks was founded in 2005 by Nir Zuk a former Check Point (NASDAQ:CHKP) employee. Its stock has done astonishingly well and returned impressive 46.9% year-to-date, while for the last 52 weeks it is up by 125.8%. Whether in a low interest market or not this is an impressing development. Its competitor, Fortinet also has done pretty well, advancing by 36.5% year-to-date and by 70.8% over the last year. However, what does the future hold for both stocks and which one is the best pick? We analyzed the latest round of 13F filings in order to get a grasp of the hedge funds’ preferences between the two companies.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular stock picks in real time since the end of August 2012. These stocks have returned 142% since then and outperformed the S&P 500 Index by 84 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Insider transactions can also offer a peak at what to expect from the company, so let’s take a look at what insiders have been doing in Palo Alto Networks and Fortinet. On June 3, Ken Xie, who founded Fortinet with his brother Michael in 2000 and currently is the company’s President and CEO, unloaded 90,000 shares. Earlier in May he sold another 30,000 shares, and currently owns 12.82 million shares or about 7.5% of Fortinet. In June, Michael Xie, VP-Engineering and CTO, disposed of 55,000 shares in addition to the 72,233 shares he sold in May, which left him with 12.1 million shares.
On the other hand, Palo Alto Networks has witnessed a large number of insider sales for the last couple of months. Among them are sales made by two key executives, Nik Zuk, who is the founder and CTO of the company, and Mark D. McLaughlin, Chairman, President, and CEO. Both executives sold large amounts of shares following which Zuk owns 2.46 million shares and McLaughlin holds 673,789 shares, versus 2.73 million shares and 682,568 shares held at the end of 2014.
Palo Alto Networks’ management says that they are confident that Palo Alto Network will be the world‘s largest security company. And even if it is not really there yet, the revenue growth of 55.4% for the last quarter and earnings growth of 71.42% are indeed appealing. However, Palo Alto Networks still hasn’t and is expected to do so also for the fiscal of 2015. Fortinet on the other hand posted earnings per share of $0.01 for the first quarter, beating the analysts’ expectations of flat EPS.
So, lastly, let’s take a look on what is in the pipeline and may work as drivers for the two companies. In May, Palo Alto Networks announced the acquisition of CirroSecure in order to incorporate applications for SaaS (Software as a Service) into its portfolio, a tool that Palo Alto Networks until now has been lacking. In May, it was also announced that Fortinet was about to buy Meru Networks (NASDAQ:MERU) in order to strengthen its strategic direction and abilities in securing Wi-Fi networks. Encouraging for both Fortinet and Palo Alto Networks is also that the market for security products is robust and growing, something we assessed in an article last week.
Overall, a total of 28 hedge funds, of the 730 we currently track, hold long positions in Fortinet as of the end of March, down by five on the quarter. However, in Palo Alto Networks, the number of funds holding shares went up to 47 from 43. In Palo Alto Networks the largest shareholder, among the hedge funds we track, is Christopher Lord ‘s Criterion Capital with 1.02 million shares, while in Fortinet, a large shareholder is Citadel Investment Group, led by Ken Griffin, with 3.21 million shares. The holdings by hedge funds increased by 20% from the last quarter of 2014 to the first of 2015, to $953,208 million in Palo Alto Networks, while in Fortinet the aggregated holding decreased by 12% to $349,401 million.
When putting the pieces together is seems like Palo Alto Networks wins this battle on points and hence is the preferred pick among the two IT-security companies. Someone who likes to take a double bet is Donald Chiboucis‘ Columbus Circle Investors that after increases by 672% and 39% keeps 786,387 shares of Palo Alto Networks and 3.17 million shares of Fortinet.
Disclosure: None
