Breakout Analysis: Palo Alto Networks

Analyzing big moves from leading stocks in invaluable. It helps us spot the next big winner, as history repeats itself in the stock market. In this week’s webinar, “Top Stocks 2014 – The Fundamental and Technical Analysis,” we went through our Top Stocks 2014 publication and provided a brief analysis of Palo Alto Networks' (PANW) breakout in 2014.

2014 was a year plagued with concerns of cyber security. Major companies such as Target, Home Depot, Michael’s stores, Neiman Marcus, and P.F. Chang’s all had well-publicized security breaches. This provided an environment where Palo Alto Networks, who emerged as a leader in the corporate cyber security space, could flourish. Here is a snap shot of their fundamental story, taken from the Top Stocks 2014 publication.

 

Now that we know the catalyst behind the move, let’s analyze the chart for constructive and supporting fundamental and technical data. An EPS rating above 80 and a steady increase in annual earnings showed positive earnings and sales growth. A Composite rating of 98 and RS rating of 98 means that PANW was outperforming 98% of all other companies in the William O’Neil database. Skyscrapers of volume at the bottom of the chart indicate strong institutional sponsorship. Heavy accumulation are further supported by an Up/Down ratio of 1.9, acceleration in funds ownership, and an Accumulation/Distribution rating of B.

There are some negative data points on this chart as well, including one bad quarter of negative earnings and a low ROE—7% vs. the typical 18% we look for. It’s important to remember that there is no such thing as a “perfect” stock, but we want to make sure that there are not too many negative data points or red flags.

On 3.6 times above average volume, the stock gapped up on 5/29/2014 and broke out from a double bottom pivot of $72.50. The high volume remains constant as funds continued to add to their position. The slope of the RS line is telling, as PANW was a clear leader in the market on its way up. Sideways price action during downtrends in the S&P 500 index line indicate institutional support, and provided opportunity for adding on the way up. PANW finished 2014 up 69% from its breakout.

 

The break of the upward channel gave investors a chance to then to sell into strength and take profits, as shown in chart below.

Sell Signal:

 

Something every growth investor can take away from this breakout: Find the leader. The chart never lies, and you can identify leaders by looking for signs of earnings growth, strong industry group, relative strength, and institutional sponsorship. The fundamentals will tell us what to invest in, while the technicals will tell us when to initiate a position.

If you have any questions, you can reach us at (800) 424-9033 or reachus@marketsmith.com. If you’re interested in ordering a copy of Top Stocks 2014, you can order it here.

 

Best Returns,

 

The MarketSmith Team