After nearly quadrupling from $11.85 to $44.25 since the start of 2007, Vasco Data Security International
(VDSI)
, a software company specializing in authentication products, has dropped 18% to $36 in four trading sessions. Is this the beginning of the end of a magnificent run, or simply a buying opportunity? The answer: You have to take chances to get ahead. Put more simply, buy this stock ahead of Thursday's earnings!
That's right, go on and step up to the plate -- the market has lobbed you a huge softball so you better take advantage of it. Why am I so sure? Well, to start, this stock was hitting all-time highs just a few days ago before recession talk tanked the overall market and an analyst downgrade got people even more scared about Vasco in particular.
Potentially frightening stuff, I agree, so it's a good thing that while 85% of Vasco's business comes from the banking sector, only 10% comes from the U.S. That's right -- let the U.S. markets tank, foreigners will buy in at discount prices, the world economy will remain strong and Vasco's core business will benefit. Maybe a little oversimplification there, but my point is that you have to think of Vasco as a play on the international economy, not the domestic one.
And this latest analyst downgrade -- hogwash! The guy even raised his price target from $38 to $42. Not that I've ever been one to listen to analysts, but Vasco has endured several downgrades during its run-up, mostly due to valuation concerns. These analysts have tried to pick Vasco's top so they can brag at cocktail parties, "I picked the top. I'm very special. I deserve a higher salary." Well guys, you're not special -- you thought the top was 25% ago. You were wrong.
As for valuation, there is some risk, but not much. Even after this quick drop in price, Vasco, whose revenues are expected to grow 65% in 2007 and 31% next year, sports a current and forward P/E of 56 and 42, respectively. Analysts, besides wanting higher salaries, also want to keep their jobs, so it's not worth it for them to recommend anything valued so highly, even if they do believe the run will continue.
Luckily for you, I don't have a salary to protect -- I call it like I see it, and I think the stock is a good buy here. Vasco has consistently exceeded expectations, and back in July (about 30% ago for the Chinese stock market), it raised full-year revenue-growth guidance from 35%-45% to 55%-65%. That's huge! And the CEO says its current banking customers represent less than one-fiftieth of the worldwide banks, so there's plenty of room for further market penetration.
Most importantly, as you can see in the chart below, since this run-up began in late 2006, Vasco's stock has tested and bounced off its 50-day moving average seven times. This is just the latest test, so while it's possible this time will be different, I think strong earnings and guidance will show that this amazing story is still developing and the longs will be rewarded.
At the time of publication, Sykes had no positions in the stocks mentioned, although positions may change at any time.Timothy Sykes trades for his own account. He managed the Cilantro Fund, starred in the reality show Wall Street Warriors, and authored An American Hedge Fund. Currently he also writes the blog timothysykes.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Sykes appreciates your feedback; click here to send him an email.
