• Nationally syndicated columnist• Email: mjberko@yahoo.com• Address: P.O. Box 8303, Largo, FL 33775© 2012 Creators.com
• Nationally syndicated columnist
• Email: mjberko@yahoo.com
• Address: P.O. Box 8303, Largo, FL 33775
© 2012 Creators.com

Dear Mr. Berko:

A friend of mine bought 1,500 shares of Sourcefire Inc. at $58 because he was told IBM will buy out the company. Can you verify this information? If the rumor isn’t true, I will still buy 150 shares if you think it is a good, long-term technology investment for my IRA. The only tech issues I own are IBM, Micron Technology and Microsoft, and I’d like to own a more aggressive tech stock. Please advise me if you think this is a good growth issue.

A.L., Moline, Ill.

Dear A.L.:

First, sell your Microsoft. Its new Windows 8 is an abomination. I spoke to an acquaintance at Morgan Stanley, which took Sourcefire public in March 2007. He is not privy to any buyout rumor. I also spoke to sources at Merrill Lynch, Citigroup and Oppenheimer, members in good standing with the New York Financial Mafia who also cover Sourcefire. Nothing!

Sourcefire (FIRE-$49.14) makes intrusion detection software that tells computer network operators if their system is being invaded by hackers or others with evil intentions. FIRE’s technology continually analyzes a client’s network traffic for irregularities, unusual incoming and outgoing traffic patterns, strange blips, spikes or nonconformist usage. FIRE uses an RNA (Real-time Network Awareness) platform, developed by its founder, Martin Roesch, called Snort because it sniffs out potential security breaches. There was talk of an IBM buyout in 2007, but there’s nothing in the oven today, and I can usually sniff out such rumors fairly well with a half-dozen phone calls.

Your friend is gambling with $90,000, and I hope he can handle the risk because I think he goofed. He goofed big time – I don’t believe any stock is worth 60 times earnings. FIRE ran up to $58 in May 2012, but I suspect that price spike was a result of a few hedge funds like Wynken, Blynken or Nod who may have been hot on FIRE. And if FIRE’s earnings rise to $1 per share on projected revenues of $228 million in 2013, I doubt it can maintain a 60 price/earnings, ratio or that it will trade at $60 a share. Rather, the P/E ratio is more likely to drop around the 45 level so FIRE is more likely to trade in the $45 to $50 range.

FIRE has around 541 employees, some 386 of whom are probably hunched in cubicles, gulping down Monster beverages and snacking on Snickers while writing code. However, considering the company’s erratic earnings history and volatile net profit margins, I’m convinced that this outfit is poorly managed. FIRE’s dinky net profit margin of 3.7 percent and weak operating margin of 6.2 percent are well below those of its peers. And its meager 2.7 percent return on assets is terribly disappointing.

Sourcefire has zero debt, and I can’t help wondering how much worse those numbers would be if management had to concern itself with managing semiannual bond interest payments. FIRE’s intelligent cybersecurity technology is good. Frankly it’s pretty darn good. But there’s lots more to running a company than producing a great product. And that “lots more” is managing other necessary tasks such as marketing, product costs, sales, expenses, human resources, banking, R&D, accounting, facilities management, customer relations, etc. Cisco Systems Inc. (CSCO-$19.01) is FIRE’s largest competitor. CSCO has $46 billion in revenue, $16 billion in debt, an operating margin of 24 percent, a net profit margin of 17 percent, return on assets of 8 percent, pays a dividend yielding 3 percent and trades at only 12 times earnings ... not 60. FIRE’s other competitors, like AVG Technologies, OPNET and Allot, also have far superior numbers.

FIRE’s wool-gathering management needs an industrial-strength enema, and its board of directors must hire professional management, not geeks, nerds and wonks, to run the company. I think the current price is too high. If you still want to add FIRE to your cast of tech stocks, consider a Good-’Til-Canceled, open order to buy FIRE at $34.