More Data, More Problems
Cybersecurity stocks have historically underperformed, because people believed ransomware hacking would never affect them. It only happened to other people, hence spending money on cybersecurity was considered an unaffordable luxury.
I think the “WannaCry” ransomware hack in 2017 may have changed that mentality, however…
For those unfamiliar with the attack, it begins and ends with a crafty piece of malware known as WannaCry.
WannaCry infiltrated 200,000 companies around the world, and in 150 countries no less. It stole mounds of data and demanded that victims pay $300.00 in ransom. The ransom doubled for those who refused to pay. If they refused a second time, the hackers threatened to delete their data.
Can you imagine losing all your work data? Invoices, memos, workplans, calendars, notes, mockups, templates…$300.00 doesn’t seem like a lot to save that. The price seems equal to the punishment.
Luckily a young cybersecurity expert triggered the “kill switch” for WannaCry (more on that below). It was stopped fairly early, which is why few people ended up paying for their data. They got lucky. But will they get so lucky the next time?
That’s what keeps me up at night.
I ask myself: What happens if these attacks become a daily nuisance?
Surely, people won’t keep paying the ransom. Surely, they’ll be rational enough to hire cybersecurity experts. And if they do, surely that means cybersecurity stocks will skyrocket—it’s the only logical outcome.
Cybersecurity Stocks to the Rescue
I’ve been keeping an eye on cybersecurity stocks for a while now.
Investors can make a killing on these stocks—there’s no doubt about that. But timing matters. It’s not enough to pick the right stocks. You want to get them at the cheapest possible price, thus allowing you to maximize your returns.
“Buy low, sell high,” right? It’s the oldest maxim in finance, yet investors tend to do the opposite when managing their own money. Mob mentality kicks in and they just follow the crowd.
Also Read: Three Top Cybersecurity Stocks for 2017
That’s why I’m so bullish on cybersecurity stocks in 2017. For the last few years, this entire asset class has crawled along, causing many investors to give up. But the recent hacks are reaching critical mass, which is driving a renewed sense of optimism into their share prices.
Take a look at the performance of cybersecurity stocks from the start of the year if you don’t believe me.
Chart courtesy of StockCharts.com
As you can see, the big fish in the cybersecurity world are doing extremely well. All of them quietly scored double-digit gains in the first quarter of 2017. I believe that’s just a taste of what they could achieve later in the year, and through 2018 for that matter.
In fact, cybersecurity may be the second-best performing industry (behind biotech) on the Nasdaq Stock Exchange. We could see a surge in competition as more firms rush to extract gains, much like we saw in the biotech space. Because this industry isn’t going to be filled out overnight, we expect it to keep growing for the foreseeable future.
Every ounce of data we use and transmit will need to be protected as hackers get more and more sophisticated. It’s not like they’ll simply lay down their arms and walk away. These so-called “black hat” hackers will continue developing new malware, which means that cybersecurity firms must stay as nimble as them.
Our good guys need to be as smart and fast as their bad guys.
3 Best Cybersecurity Stocks in 2017
Now, of course, comes the hard part. Which cybersecurity stocks should you be bullish on?
I personally lean towards the bigger players in the field. Not just because they have first-mover advantage, but also because they can buy out the competition. I’ve seen it happen time and time again.
Studies have shown that markets tend to organize themselves into specific patterns. In many cases, there are three companies left standing, each one twice the market share of the next biggest. (Source: “The Rule of Three and Four,” Boston Consulting Group, last accessed May 16, 2017.)
The “number one” company has twice the shares of the “number two,” and the number two company has twice that of “number three.”
It is a business tale that repeats through history.
The Boston Consulting Group, for instance, showed how this process shaped the rental car market. According to is research, this “Rule of Three and Four” is how Enterprise, Hertz Global Holdings Inc (NYSE:HRI), and Avis Budget Group Inc. (NASDAQ:CAR) ended up—through a series of mergers and acquisitions—in the one, two, and three positions, respectively.
If we apply the same model to cybersecurity stocks, it may help us understand which firms will benefit from the WannaCry hack.
Here are three top contenders.
1. Symantec Corporation
One of the best cybersecurity stocks in 2017 is Symantec Corporation (NASDAQ:SYMC). However, you may know this company better by its flagship product: “Norton Antivirus.”
Norton Antivirus is the first line of defense. It is the little window that pops up on your computer screen, alerting you to toxic files. It is a filter for downloads, a warning system for malware, an immune system for data. Even more importantly, it’s already installed on roughly 40 million computers.
Owing to an early partnership with Microsoft Corporation (NASDAQ:MSFT), Symantec was able to establish a foothold in the PC market. In doing so, it became synonymous with what industry folks call “endpoint security.”
An “endpoint” is simply a device, such as a laptop, smartphone, or tablet. Symantec specializes in software that protects these devices, which makes it particularly relevant to the future of cybersecurity.
As discussed earlier, the prospect of losing all our personal data should feel like an imminent threat since 200,000 computers were hacked by one piece of ransomware. Symantec is one of the best-equipped companies to deal with these issues, which is why I believe it will be one of the top 3 cybersecurity stocks in 2017.
In the last year, it appears the market has started to agree with me. Here’s the performance of SYMC stock over the last 12 months.
Chart courtesy of StockCharts.com
2. Check Point Software Technologies Ltd.
Dear reader, do you remember what I wrote when cybersecurity stocks floundered through 2015 and 2016? I repeated three words, over and over: Stay the course.
I wrote that mantra again and again because there was nothing to fear—the facts about cybersecurity had not changed. We still lived in a world of ever increasing data, and that data was still vulnerable to hackers. Digital predators had not vanished overnight. All that happened was a little bit of economic turmoil that weighed heavy on young stocks. That’s all.
But now, companies like Check Point Software Technologies Ltd. (NASDAQ:CHKP) are roaring back to life. We have, for instance, registered a 38.7% uptick in the value of CHKP stock largely off the strength of a recent earnings report. Not only does this suggest a broader recovery in cyberdefense spending, but it also signals a tipping point for the industry at large.
Chart courtesy of StockCharts.com
No kidding. “We started off 2017 with a positive trend delivering earning per share and revenues towards the top end of our projections,” said CEO Gil Shwed. (Source: “Check Point Press Releases,” Check Point Software Technologies Ltd., April 27, 2017.)
For the first quarter of 2017, Check Point delivered an eight-percent increase in year-over-year revenue. Its overall pie grew from $404.0 million to $435.0 million. And unlike some prominent tech firms that will go unmentioned, Check Point is converting that revenue into PROFITS.
You know, that thing business are supposed to making…
It’s not pocket change, either.
Check Point made $183.0 million of net profit in the first three months of the year, up from $167.0 million in the same quarter last year. A net margin of 42.1% is nothing to sneer at. It’s a rare breed of company that can provide that kind of fundamental support for high-pace growth.
3. Gigamon Inc
Gigamon Inc (NYSE:GIMO) is conservatively valued despite being one of the few cybersecurity companies to turn a profit. It is trading at only 26.46 times earnings, which is absurd once you understand its purpose.
In its own words, Gigamon “provides active visibility into data-in-motion network traffic, enabling stronger security and superior performance.” (Source: “About Us,” Gigamon Inc, last accessed May 23, 2017.)
If that sounds like Greek to you, let me translate it into plain English: Gigamon is like a security camera.
This company monitors network traffic so that companies have greater intelligence about how to secure their data. It is like having cameras set up in the back of a store or an alleyway—it gives you visibility where you really need it.
The mere presence of oversight can dissuade potential attackers from targeting your business, which is what makes Gigamon’s potential market so huge.
We estimate that many clients will choose their low-cost solutions over other, somewhat expensive, alternatives. This could lead to an explosion in Gigamon’s share price.
Chart courtesy of StockCharts.com
The various tailwinds driving GIMO stock all converge at a much higher price point than where it is trading today. At present, GIMO stock is trading at well below its fair price. Retail investors haven’t clued into this corner of cybersecurity, so it’s just a waiting game. Those who get in earlier have a greater likelihood of reaching triple-digit returns, particularly as public awareness of cyberattacks continues to grow.
Should You Buy Cybersecurity Stocks?
Today’s internet is like the Wild West.
There are few rules, and even fewer ways to enforce the rules that do exist. We’re completely naked and vulnerable, yet most of us don’t even know it. That’s why cybersecurity firms haven’t grown as fast as expected.
It’s because we used to think of cyberattacks as something distant, something that happens to celebrities, mega-corporations, or governments. We used to think we were safe, but the WannaCry ransomware attack woke us up.
This is the first time people are scared. I mean really, REALLY scared. I’ve never heard so many people question the safety of their data, at least not like this before. Everyone is starting to realize that they can’t live in the Wild West of the internet without a little security.
Sooner or later cybersecurity becomes less expensive than the ransom you have to pay for stolen data. In other words, companies realize it’s flat-out insane to leave their data exposed. Without adequate protection, their data is just waiting to be poached by a skillful hacker.