A 113.70% return in 2019 for shares of Zscaler, Inc. (ZS) is likely the result of institutional investors buying the shares. Demand was even seen this week in the shares. The way the shares have traded tells a story of a stock gaining alongside a large amount of unusual trading activity.

It’s a bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is likely involved. Over time, we've learned how stocks with a history of strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks … the best in class. 

The main criteria we look for when betting on the upside are a history of strong fundamentals, strong technicals, and big potential buying in the shares. I'll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in the trading activity of the shares.

Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For nearly all of 2019, Zscaler stock has been gaining alongside unusual buy signals. It's all about stacking the odds in your favor.

For Mapsignals, when we look for an entry on a leading stock, we want to see an increase in potential buying. Just to show you graphically what our unusual trading activity signal looks like, have a look at all of the unusual institutional (UI) signals Zscaler stock has made over the past year. Looking at 2019, there have been days when the shares appear to have had a buyer. This is notable because stocks move based on supply and demand. What is really catching our eye now is the recent UI buying. The shares have more than doubled year to date (YTD) alongside big buy signals:

Chart showing the unusual institutional (UI) signals made by Zscaler, Inc. (ZS)

In 2019, Zscaler stock has logged 19 unusually high-volume days, indicative of buying in the shares starting on Jan. 7, 2019 (see chart above). This points to Zscaler gaining in an unusual way, which suggests that demand for the stock is increasing.

If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows an increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Below are a few areas in which Zscaler stock has grabbed our attention:

  • YTD outperformance vs. market: +93.83% vs. SPDR S&P 500 ETF (SPY
  • YTD outperformance vs. technology sector: +84.83% vs. Technology Select Sector SPDR ETF (XLK)
  • Recent bullish unusual trading signals

Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the times this year when Zscaler stock made the top 20 report for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we caught the massive run-up beginning this year. That's exactly what our process is designed to do. This is a monster outperformer year to date. We'd even venture to call this stock an outlier:

Chart showing the top-rated buy signals made by Zscaler, Inc. (ZS)

On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. Zscaler has seen a big bump recently in performance … the recent earnings report showed a lot of growth:

  • Q3 2019 year-over-year revenue growth rate: +61%
  • Q3 2019 non-GAAP net income growth rate: +184%

Zsclaer is breaking out recently alongside other high-quality technology stocks. We believe that the current level for the shares is in position for further upside. The narrative for Zscaler and other cloud companies is one of massive growth. We are always on the lookout for great companies showing unusual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.

The Bottom Line

Zscaler stock represents a potential buying opportunity for the long-term investor. Given the lift in price, strong fundamentals, and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio. 

Disclosure: The author holds no position in Zscaler shares at the time of publication.

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