A Good Value in a Market Where That's Hard to Find
Here's how I'm setting up a likely profitable trade, betting this cybersecurity firm has hit bottom.
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This latest trade idea is around a stock that is a decent value in an overbought market. In my view, there is likely to be little downside from here for the shares, but they are unlikely to sprint forward either. However, this scenario sets up nicely for a covered call trade — especially since the options around the equity are quite liquid and offer up a good return.
Either I will get a lower entry point and a better value on the stock, or I will generate a return in the high teens over the option duration. With a market that feels more than vulnerable to a pullback in the coming months, I like either possibility.
Shares of cybersecurity concern Rapid7, Inc. RPD soared from the Covid lockdowns through late 2021. At that point, valuations around the stock bordered on comical and the space also attracted greater competition. RPD shares are down some 85% from their high point of nearly four years ago. However, the stock has stabilized in recent months and looks like it has established a decent floor.
Rapid7 offers cloud-based subscription services, managed services products, and licensed on-premise software. The Boston-based company provides a technical platform that is designed to unify all customer data and provide a 360-degree view of its attack surface, enabling better threat detection and risk remediation. Rapid7 currently has a market cap of around $1.3 billion.
Almost all of Rapid7’s revenue comes from product subscriptions, with the balance garnered from low-margin professional services, primarily deployment and training services. Approximately 70% of its revenue comes from North America.
Slowing growth caused the company to lay off nearly 20% of its sales force in 2023 and nearly the entire C-suite turned over in 2024. The poor performance and declining stock price attracted the attention of noted activist investor Jana Partners. That firm and its affiliates took an over 12% stake in Rapid7 and pushed to effect a sale of the company late in 2024. Failing that, Jana has turned its focus to improving the operating performance of Rapid7. The activist also added more than $15 million to its stake in Rapid7 in August.
Rapid7’s balance sheet is in good shape and the company is nicely profitable. Earnings growth should return in 2026 and sales growth should continue to be in the low-single digits. All of this is reflected in the stock’s valuation of approximately 10 times trailing earnings. Jana’s interest and stake in RPD probably keeps a nice floor under the shares and if they are effective in improving performance that should lead to higher profit margins.
RPD shares are a decent value in a market where those are hard to find. The risk/reward profile can also be enhanced with the following covered call trade.
Option Strategy
This is how one can initiate a holding in RPD with a covered call order. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the April $20 call strikes, fashion a covered call order with a net debit in the $16.80 to $17.00 a share range (net stock price - option premium).
This strategy provides downside protection of approximately 18% with similar upside potential even if this equity trades slightly down over the option duration.
At the time of publication, Jensen was long RPD.
