We are buying the dip on this cybersecurity stock
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The NortonLifeLock logo can be seen on the screen of a smartphone as well as a PC in this illustration.
Pavlo Gonchar | SOPA Images | LightRocket | Getty Images
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Just before the close bell we’ll be purchasing 300 shares NortonLifeLock (NLOK) at roughly $24.89. The Charitable Trust will now own 2600 NortonLifeLock shares, which is 1.53% of its portfolio, following the trade.
Jim closes the trade five minutes prior to the closing of the market if Jim receives a trade alert with less than 45 minutes remaining in the trading day. We assume that members of the Investing Club will get a higher price than we receive by waiting.
NortonLifeLock, which announced Monday morning its planned merger with Avast (a European-based consumer cybersecurity provider), was approved by the U.S. Department of Justice. This news cleared a regulatory hurdle we thought could pose some risks because it combined two of the three top market leaders in the consumer cybersecurity sector. NortonLifeLock expects that the transaction will close by mid-2022.
NortonLifeLock’s shares fell by around 2 to 3% at the time of this writing, even though it is optimistic news. After Monday’s news, several names from the cybersecurity industry were lower on Monday. Morgan Stanley initiated CrowdStrike with an underweight ratingHowever, there may be a reason for the NLOK decrease that is specific to a particular company.
Why is there a pullback?
Today’s pullback could be due to NortonLifelock having to issue stock as part the transaction. The final terms of the deal are dependent on the election by Avast shareholders — the meeting is scheduled for this Thursday — but by and large, investors do not like it when their ownership percentage of a company gets diluted. We are happy with NortonLifeLock’s stock dilution, regardless of how much.
Avast and NortonLifeLock are strategic partners that make both financial and strategic sense. This merger creates the leading industry provider of privacy and consumer identity solutions, with more than 500 million users and approximately 40 million customers. We see those numbers growing in the coming years, as the combined company puts together a comprehensive offering in consumer cyber safety — which is a significantly unpenetrated market that will only become more important as more and more of our daily lives become ingrained into the digital world.
The deal offers significant value addition opportunities. Management estimates that $280million in annual gross costs synergies can be found.
NortonLifeLock will partially compensate the loss and maximize its capital structure if Avast shareholders elect to hold the majority share option. It plans to increase its existing share buyback program to up to $3Billion to offset any dilution. Management will be able to counter dilution through repurchasing stock first, as the combined company is expected to produce $1.5 billion in free cash flow each year.
The Bottom Line
We are expanding our holdings because we have a positive outlook on the merger. We have made a few opportunistic sales over the last six months. 300 shares were sold at $26.72 while 300 more shares were sold at $27.47. This is a good level for us to start buying back our higher-priced shares.
We note also that NLOK provides investors a solid 2% yield. This pays while we wait for next year’s merger. NLOK is also traded at a low-teen forward price and earnings multiple. This represents a substantial discount from McAfee’s lower-20s takeout multiple. NLOK might be slow to grow, but its multiple should increase as investors gain appreciation for market leadership.
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You will be notified by Jim Cramer if you subscribe to CNBC Investing Club. Jim may then make a trade. Jim typically waits for a trade signal to be sent before buying or selling stock from his portfolio of charitable trust stocks. Jim must wait 5 minutes before sending a trade alert to the market, if it is pre-market. Jim executes trades if issued within 45 minutes of market opening. Jim can wait 72 hours before execution if the alert is issued after he’s spoken on CNBC TV about a stock. See here for the investing disclaimer.
(Jim Cramer’s Charitable Trust has been NLOK for a long time.
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