Stocks Under $10 That I Like: Zix Corporation

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About: Zix Corporation (ZIXI)
by: Rick Pendergraft
Summary

Zix Corporation provides email encryption and data loss prevention solutions.

The company has made a turnaround in recent years and is now growing earnings and sales.

Management efficiency measurements are well above average.

The charts show how the rally has accelerated in recent years.

During the tech-bubble in the 90s, there were many companies that jumped 500%, 1000% after they went public. Many of them were internet companies, but tech companies, in general, did extremely well and produced huge gains for investors. Of course, many of those same companies came crashing back down to Earth in the bear market of 2000-2002.

Zix Corporation (ZIXI) is a pretty good example of the astronomical rally followed by an epic collapse. The software firm formed in 1988 and spent most of the 90s priced under $10 a share. In fact, on January 2, 1998, the stock opened at $4 even. By the end of 1999, the stock was trading right around $40 a share. It would eventually go as high as $96.50 in March 2000. We are talking about a 2,312% gain in just over two years - incredible.

Of course, the flip side of that story is the dramatic fall. By the end of 2000, the stock was back down under $10. It would eventually drop to a low of $2.15 in July 2002 before eventually rebounding back up to $18.55 in April 2004. Unfortunately, the stock took another dramatic fall from 2004 through September 2006 and eventually bottomed at $0.51 a share.

I hear the term "parabolic" used to describe huge jumps in stocks quite often, but to me, the phrase is being used incorrectly. A parabola is a shape that has two sides to it - the upward move and then the downward move or the downward move followed by the upward move. Most of the time when someone uses "parabolic" to describe a stock's performance, they are really referring to a huge rally and that isn't a parabolic shape at all. In the case of Zix, the shape of the chart really was a parabola.

ZIX Tech Bubble.png

While that is the story of Zix in the late 90s and early 2000s, the company did survive and, in fact, has evolved and is doing well once again.

Email Security and Data Loss Prevention are Paying Off for Zix

Zix provides email encryption, data loss prevention (DLP), threat protection, and mobile security solutions to its clients. The Dallas-based company serves clients in the financial services, healthcare, and insurance industries as well as various governmental groups. The company was originally called ZixIt Corporation when it was founded in 1988, but it changed its name to just Zix Corporation in 2002.

The company struggled in the first decade of the 21st century, but it has found its footing and has been doing quite well in the last few years. Zix has seen its earnings grow by 10% per year over the last three years, and analysts expect the company to see earnings growth of 24% this year.

Sales have also increased by 10% per year over the last three years and they were up 76% on a year over year basis in the first quarter. Analysts are expecting a huge boost to sales in the second and third quarters with estimated increases of 155% and 157%.

In addition to the earnings and sales growth, Zix has strong management efficiency measurements. The return on equity is at 33.4% and the profit margin is at 24.8% currently.

The Rally has Accelerated in the Last Year and a Half

When the bear market of 2007-2009 ended, Zix was trading around $1 a share. The stock has been trending higher ever since and from the beginning of 2011 through the end of 2018, the stock cycled higher within a pretty clearly defined trend channel. The lower rail connects the lows from 2011, 2012, 2014, 2016, and 2018.

ZIX SA3.png

The upper rail connects the highs from 2011, 2017, and 2018. As you can see on the chart above, the stock broke out above the trend channel earlier this year. In fact, if you connect the lows from 2018, you see how the rally has accelerated considerably since the beginning of 2018.

ZIX SA2.png

Breaking it down even more and looking at the daily chart, we see that the stock appears to be moving higher within a new trend channel. The two lows from April connect with the recent low to form the lower rail of the channel, while the upper rail connects the highs from February and May.

ZIXI SA.png

This channel isn't as clean as the weekly channel from 2011 through 2018, but it shows a pretty clearly defined upward trend, nevertheless.

Very Little Analysts Coverage Could be a Good Thing

Looking at the sentiment toward Zix, there are only four analysts covering the stock currently and all four have the stock rated as a "buy". If we were talking about a company with 20 analysts following it and all 20 rated the stock as a buy that would be a red flag for me. However, because we are talking about a stock that is under $10 and only four analysts are following the stock, I don't mind that all of the ratings are buys. It leaves room for the stock to get additional coverage in the future.

ZIX Analysts Ratings.jpg

In previous articles about Vipshop (VIPS) and Companhia Siderurgica Nacional (SID), I have talked about how to read the sentiment toward low-priced stocks like these. It's rare to see a high short interest ratio when the stocks are trading under $15 because the shares become hard to borrow. Zix is no exception here either. The current short interest ratio is 1.33.

The number of shares sold short has been rising over the past year, but that has been offset by a jump in the average daily trading volume. At the end of December, there were only 784,416 shares sold short, but the average daily trading volume was only 359,072. There are now 1,395,574 shares sold short, but the average daily trading volume has jumped to 1,044,001.

The overall changes in shares sold short and average daily trading volume have caused the ratio to fall.

My Overall Take on Zix Corporation

I am pretty bullish on Zix. The company has made a big turnaround and now they are growing earnings and sales at a solid pace, and the management efficiency measurements are well above average.

The trend on the chart is impressive and I love the way the rally has accelerated in 2019. I think the recent bounce off of the 50-day is a good sign for the stock and I expect it to continue its upward trend.

Another factor in why I am bullish on Zix is the ongoing news of major data breaches, the various email hacking stories, and even the election interference during the 2016 election. All of these events drive businesses to increase their cyber-security and that should lead to more business for Zix. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) even partnered with Zix in 2014 to create Google Apps Message Encryption.

Data theft and email spying aren't going to go away any time soon. If anything, they are only going to get worse as technology continues to change and as we incorporate technology into our everyday lives more and more. To me, this only means that companies like Zix continue growing well into the future.

As for targets for Zix, the obvious first layer of resistance is the recent high at $11.15. I think the stock can take out that high without much of an effort. The next layer of resistance comes in the $18.50 area - the high from 2004. This resistance could be a little more difficult to take out, but I think the stock can move above it within the next few years. If it does move above the resistance, it could continue climbing up to the $35 to $40 range.

One strategy investors can take, and I have done this with investments in my own portfolio, is to close half of the position at 100%. By closing half of the position at 100%, you have guaranteed yourself a breakeven trade no matter what happens from there. Even if the stock drops to zero, you would break even on the investment. But you also have half of the position open to collect more potential gains.

In this case, the $18.50 area would mean a gain of approximately 100% from the current price and, like I said, it could act as resistance. Closing half of the position at that level makes a lot of sense.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.