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Thursday, April 14th, 2011

Last week, I wrote a piece (called an important notice) about the vulnerabilities in market operations that nobody talks about, including the security of the networks that are relied upon.  The next day my main workstation was attacked by a nasty computer virus by the name of LizaMoon.  It seems a bit too much of a coincidence.  In any case, I couldn’t follow my normal routine, which got me thinking about how I spend my days and how these wonderful but frustrating machines have changed how we approach our work.

That led me to look at some technology companies and their stocks and, invariably given the problems that I had endured, those that deal with systems security.  The first thing I was reminded of was how many have been bought out and are now part of other companies.  But in looking at one that still is independent, Check Point (CHKP), I got redirected again, given the memories of 1999 that it triggered.

Above is the stock price of CHKP, along with the sales per share and earnings per share for the preceding twelve months at each point in time.  The first peak in the stock coincided with the initial crack in the dot-coms — CHKP was then changing hands at a hundred times trailing sales.  But business was getting better and the stock went even higher later in the year, despite the carnage around it.  Eventually, it succumbed to the undertow and, after steady fundamental improvement for almost a decade, still trades at less than half of what it did then.

I read a lot these days about how valuation doesn’t matter, but it alters the matrix of probabilities.  Prices can be redirected in a hurry (the decline in CHKP was glacial compared to many other stocks of the time), even when the market mechanism is functioning perfectly.  (Chart:  Bloomberg terminal.)