CNBC contributor Jeff Kilburg is buying Fortinet and Cloudflare for the fourth quarter, though both trade above analyst targets. By his count, only Arista, his third pick, sits roughly 20% below its target.

The KKM Financial founder pitched the trio on CNBC’s The Exchange as a way to profit from AI spending. He also conceded Cloudflare does not make money.

Why Buy Stocks Trading Above Analyst Targets?

Kilburg calls the trio a way to play AI spending without owning hyperscalers, the cloud giants buying the chips.

By contrast, Arista, which sells data center networking gear, is up about 58% this year, he said. He points to operating margins near 50% and says hyperscalers will not skimp on networking.

Fortinet, a cybersecurity vendor, is up 130% this year and trades at about 53 times projected earnings, he said. He already holds CrowdStrike and Palo Alto Networks, so Fortinet adds diversification rather than a new theme.

Cloudflare, which routes and secures internet traffic, trades above a $350 target, Kilburg said. He put its forward price-to-earnings (P/E) ratio near 300. However, host Kelly Evans cited 246.

Evans likened the multiple to Netflix’s early years, when that stock’s earnings also looked hard to defend.

Can 29% Earnings Growth Outweigh a 5.3% Yield?

Kilburg’s offset is profit growth. FactSet projects S&P 500 earnings up about 29% in the third quarter, a third straight reading above 25%.

He sets that against an 8% average over the past decade.

Meanwhile, the 10-year yield hit its highest level since 2002, and matches iCapital’s raised yield forecast of 5.3%.

Still, the basket also depends on AI budgets holding up. Schwab’s Kevin Gordon has warned that one mega-cap capital spending miss could disrupt the AI-driven market.

With borrowing costs at multi-decade highs, third-quarter reports may show whether profit growth can keep carrying premium multiples.

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