This has been a year of the have and have-nots for sure. The S&P 500 is up about 12% year to date. However, just five stocks made up 22% of that gain, while the other 495 made up a paltry 5%. Some stay-at-home companies have rocketed to incredible highs while mega-cap energy companies have been hammered and removed from the Dow Jones industrial average. One thing is for sure. The potential for 2021 is huge, and one technology subsector could be poised for massive gains.

In a new Baird research report, the firm’s security and infrastructure analysts take a long look at third-quarter performance for the top companies in their coverage universe, and one thing stands out. While momentum for the group has stayed solid in 2020, the ongoing shifts to remote working and the cloud make the subsector invaluable for companies looking to protect enterprise integrity.

Baird’s three top picks in the subsector stand out as outstanding ideas for aggressive growth investors looking to initiate or add to positions. While all are rated Outperform at the firm, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Top Pick

This is the number one idea at Baird for the subsector. Splunk Inc. (NASDAQ: SPLK) provides a software platform for collecting, storing, indexing, searching and analyzing machine-generated data, such as log files and configuration files, which are prevalent in every type of IT system, device and application.

Splunk technology is potentially applicable and disruptive in several market segments, including IT operations, security and compliance, and business intelligence. These market segments are collectively worth $28 billion today.

Wall Street analysts agree that the company offers the de facto standard for security information and event management. It also offers orchestration solutions for security operations, a fast emerging category of products.

The Baird analysts love the company’s prospects:

We are naming Splunk as our top pick exiting the third quarter. We expect that the company will continue to drive strong growth in the cloud business and annual recurring revenue. While we acknowledge that the financial model remains noisy as a result of the shifting business mix, we believe management has clearly communicated longer-term targets and expect that an increasing base of cloud ARR can help drive the stock higher. We see the company as extremely well-positioned with its SIEM solution in security and believe that recent investments in the observability portfolio can be another driver to growth.

Baird has a $240 price target on the stock, which is above the $233.77 Wall Street consensus target. Splunk stock closed at $193.10 per share on Wednesday.

Top Long-Term Picks

Cloudflare Inc. (NYSE: NET) is a more off-the-radar cybersecurity pick that has big potential upside in a red-hot industry, and some feel it could be a potential takeover target. The company provides an integrated cloud-based security solution to secure a range of combinations of platforms, including public cloud, private cloud, on premise, software-as-a-service applications, and Internet of Things (IoT) devices.

Cloudflare’s security products include Cloud Firewall, Bot Management, Distributed Denial of Service, Infrastructure Protection, IoT, SSL/TLS, Secure Origin Connection and Rate Limiting. The company also offers performance solutions, which include Content Delivery, Intelligent Routing, and Mobile Software Development Kit, as well as Content, Mobile, and Image Optimization.

In addition, the company provides Reliability solutions, comprising Load Balancing, Anycast Network, Virtual Backbone, DNS, DNS Resolver and Always Online. Further, the company provides solutions to protect an organization’s internal resources, such as devices, users, applications and data, comprising Zero Trust Security and Access Management, which secures, authenticates and monitors user access to internal applications and infrastructure hosted on-premise or in cloud environments, as well as Secure Web Gateway to secure and filter outbound internet traffic to protect employees from threats on the public internet and to help protect internet-browsing employees from bringing malware or vulnerable code into an organization.

The Baird analysts weighed in on the company in the report:

Cloudflare remains one of our top long-term picks. We believe the extremely innovative company is poised for success with its portfolio of cloud-delivered security and networking solutions. Additionally, we expect the company remains early in the enterprise opportunity and with certain products such as Workers, and we expect Cloudflare will continue to execute successfully toward its significant long-term growth opportunity.

The Baird price objective is $67, which is in line with the consensus target price of $67.88. The last Cloudflare stock trade on Wednesday hit the tape at $64.48.

CrowdStrike Holdings Inc. (NASDAQ: CRWD) shares pulled back recently after a stellar run and offer an outstanding entry point. The cybersecurity giant is a leader in the endpoint protection platform (EPP) market. EPP solutions help protect enterprises’ internet-connected devices from cyberattacks, and there is a market shift from signature-based on-premises solutions to cloud-based platforms that use machine learning.

CrowdStrike’s platform is one of the few 100% cloud-based architectures and is uniquely positioned to displace incumbents with its platform breadth, including advanced detection and remediation capabilities.

Baird had this to say as the stock recently was rerated:

We are naming recently upgraded CrowdStrike as one of our top long term picks. We believe the company is well-positioned for sustainable success in a market where the share leaders have failed to innovate. Outside of core endpoint security, we expect CrowdStrike can continue to drive strong multi-module adoption, leading to increased stickiness and better long-term positioning.

The $155 Baird price target compares with a posted consensus target of $159.81. CrowdStrike stock was last seen trading at $137.68 per share.

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While the whirlwind around the top stocks in the subsector has slowed dramatically from the pace of five and six years ago, the need is increasing every year sequentially. These top companies offer investors solid plays in a multitude of areas. Most importantly, they all are trading at levels that offer solid entry points.

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