Analysis: PANW NVDA ITW CRM WRK

Shortly before the closing bell, we will be initiating a position in Palo Alto Networks (PANW) , buying 150 shares at roughly $212.08. Following the trade, PANW will represent 1.10% of the portfolio.

We are bringing PANW out of the Bullpen and into the portfolio as our exits of Nvidia (NVDA)  here and Illinois Tool Works (ITW)  here have made room for this additional name. Palo Alto Networks' 2017 investor day presentation can be found at this site here.

Given all of the recent headlines surrounding cybersecurity, we believe the need for network security is a priority and spending/investment in the field will unlikely slow. As a whole, the security market is big once that continually evolves to meet the needs of clients. Palo Alto Networks believes the size of the security market is close to $100 billion in 2018 and is expected to grow at a CAGR of about 9% over the next five years.

Palo Alto Networks is a next-generation, subscription based, network security company. It is viewed as the leader in cybersecurity with solutions so intelligent that they can stop a threat without comprising performance.

And we know the cyber-sphere can be precarious at times. Technological advancement has decreased the cost of computing power, making cyber criminals better equipped to develop new techniques and tactics to compromise an organization's well-being. The Palo Alto Networks Next-Generation Security Platform addresses the challenges in the marketplace by combining network and endpoint security with threat intelligence to provide automated protection and prevent cyber breaches. The platform has several functions, including prevent successful cyberattacks, safely enable applications, eliminate the performance comprise, instill confidence to growing businesses, and maintain trust and reputation in the digital world.

The ongoing adoption of the cloud at the enterprise level (something we know from Salesforce.com's (CRM) lofty revenue targets) should also be a tailwind for Palo Alto Networks. The "digital transformation" we often here from Salesforce.com Co-CEO Marc Benioff applies to Palo Alto too, as told by CEO Nikesh Arora on the company's most recent earnings call.

"The increased complexity of managing these changing IT environments is creating significant challenges for enterprise security practitioners," Arora said. "We believe that the benefits organizations seek as they make these transitions cannot be fully realized unless security solutions transform with them. Digital transformation requires security transformation, which gives me a lot of confidence in the continued growth in security spending."

Even though he is relatively new to cybersecurity, Arora has a fantastic reputation in the tech industry. Prior to taking over the role of CEO, Arora spent time as the COO at Softbank and was also the chief business office at Google. A trait we admire was his early confidence in the company, exemplified by his $6.6 million personal purchase of shares on June 6, just a few days after taking over as CEO. That is what we call putting your money where your mouth is.

In some recent news, the company announced it entered a definitive agreement to acquire RedLock, a public cloud security analytics company that adds critical security analytics capabilities across multi-cloud environment and supports Amazon Web Services, the Google Cloud Platform, and Azure.

And then just yesterday, the stock was named a "Top Pick" by analysts at Morgan Stanley, who called Palo Alto Networks a clear share gainer in what they believe to be a healthy security market through the rest of this year into next. Arora is known for his deal-making, and this recent move is an example of how he will find ways to increase the value proposition of the company's platform.

We are initiating the position with a $265 price target, which reflects roughly 18.75x FY2020 EV/FCF. That being said, we believe there is more room for upside here should the industry expand, more customers are won, and the balance sheet is used to build out the platform.

True to our nature, we are starting relatively small in PANW as we want to leave room to scale into the position over time. We are not early here, but we like that we are getting the stock roughly 11.5% off the highs made after a strong print in September and we view the stock's decline to current levels as less about the stock and the industry and more about market dynamics. That's an opportunity to pounce on.

Lastly, we want to provide another update on WestRock (WRK) . The shares continue to be pressured off analysts downgrades and worries of capacity addition, causing WRK to precipitously fall on Tuesday. There are still a few sell-side analysts out there who need to bring down numbers, but we are going to battle from this point on. We nibbled at the stock for the first time since the beginning of August earlier this morning (see our Alert here) because we believe the healthy yield provides a level of protection. Plus, the group now trades at roughly 13x next 12-month earnings, which is in range of a historically profitable time to buy.