The Best of Kass

Tickers in this article: FIO FIRE AIG
NEW YORK ( TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

Among his posts this past week, Kass explained why he is long Sourcefire and Fusion-io, analyzed the week's CPI and industrial production numbers and identified which government bailout recipient will be his biggest bullish investment.

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Delving Into Sourcefire and Fusion-io
Originally published on Friday, Oct. 19 at 11:58 a.m. EDT.

  • Here is a detailed analysis of my long strategy on these two tech names.
  • Weak order guidance at Fortinet (FTNT) , Mellanox Technologies (MLNX) and Check Point Software Technologies (CHKP) ; EPS whiffs at Microsoft (MSFT) , Google (GOOG) , IBM (IBM) and Intel (INTC) ; and the threat of Palo Alto Networks' (PANW) market-share inroads in security (overplayed!) have put a pall around a number of new, emerging tech names -- including Sourcefire (FIRE) and Fusion-io (FIO) .

    Yahoo! (YHOO) , Fusion-io and Sourcefire are my only technology longs, and they are small positions given my overall negative view of the sector.

    While I am a buyer of both on weakness (I added late yesterday), Sourcefire seems the most interesting given its vulnerability to a takeover and its statement that earnings (to be reported on Oct. 30) will slightly beat consensus expectations. That said, Fusion-io has superior fundamentals.

    Given CEO John Burris's departure due to colon cancer, Sourcefire is a bona fide takeover target (with an estimated private market value of close to $60 per share). Numerous companies could be interested, including EMC (EMC) , Oracle (ORCL) , Cisco Systems (CSCO) and IBM. Its market share is solid and growing, and the company has a growing presence in the next-generation firewall market. There is plenty opportunity for the company to expand its profit margins.

    As to Fusion-io, I would be buying on weakness based on the following:

    • Wall Street has been concerned about the sustainability of gross margins, but new products and long-term NAND contracts should offset these questions.
    • Flash-based storage/servers are just beginning to gain traction.
    • Several competitors are rudderless -- for instance, OCZ Technology (OCZ) and STEC (STEC) have lost their CEOs.
    • While Fusion-io is larger than Sourcefire, there is still a chance of a takeover -- Cisco, Oracle and EMC are trying to compete, but if they don't execute, they might be interested buyers down the road.

    Obviously, both stocks' performance will be contingent on fourth-quarter guidance.

    If either gives an all-clear, the stocks will be off to the races.

    At the time of publication, Kass was long FIRE, FIO and YHOO .