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IBD 50 Growth Stocks To Watch: Zscaler, Cybersecurity Stocks Show Strength

Security software developer Zscaler (ZS), a leader among cloud-based cybersecurity stocks, is Wednesday’s IBD 50 Stock To Watch.




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The stock carries a solid 93 Composite Rating from IBD. That ranks it No. 4 among the highly competitive cybersecurity stocks industry group, just behind Fortinet (FTNT), Mimecast (MIME) and Palo Alto Networks (PANW).

The software-security group itself ranks high among the 197 industry groups tracked by IBD.

Zscaler strode past analyst expectations for earnings, revenue and billings for its fiscal fourth quarter. The company has now topped analyst’ earnings targets over the past four quarters by 25% to 133%.

More than a dozen analysts weighed in with price target increases following Zscaler’s fiscal fourth-quarter report on Sept. 10. The highest was a 345 target from Needham. The lowest came in at 275, with an equal-weight rating, from Morgan Stanley.

The stock fell following the report, almost at the start of its current base pattern.

Cybersecurity Stocks: Zscaler’s Caveats

The leading caveat for Zscaler, from a chart reader’s perspective, is that it has advanced beyond a fourth-stage base. Bases beyond stage three are considered late-stage. This is not a deal killer — some stocks climb well into late-stage patterns.

But it does add more risk to a future breakout. Stocks ringed by too many warning flags are normally a no-go. And even stocks with one or two caution signs are more likely to falter during the breakout process.

All else being equal, you’d rather choose an early-stage leader over a late stage. But Zscaler’s track record is solid, with two successful breakouts under its belt in the current run up. Shares have gained more than 43% so far this year.

Currently, the stock is up more than 27% from its most recent breakout, in July. That means the current base, a flat base with a buy point at 293.54, is a fourth-stage pattern. Zscaler stock is also technically in a buy range after a rebound from support at its 10-week moving average. Its relative strength line is showing impressive strength, climbing to new highs, despite the stock market’s ongoing correction.

(The RS lines of cybersecurity stocks Fortinet and Palo Alto are showing similar strength.)

However, 10-week rebounds in late-stage territory tend to be weaker than earlier stage breakouts. And with the market in a correction, a late-stage rebound from support is a doubly-risky target.

That makes waiting for the flat base buy point at 293.54 the best bet. Zscaler stock traded 3% below that entry on Wednesday.

Please follow Alan R. Elliott on Twitter @IBD_Aelliott

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