A Big Bet On Cyber Security

By Aaron Levitt | April 04, 2013 AAA

Even the First Lady isn’t safe. No, it wasn’t threats of violence or retaliation from some third-world dictator-ruled nation. Michelle Obama became a victim of computer hacking when some of her personal financial information was accessed and exposed online. The fact that the First Lady of the United States could fall victim of a cyber-attack highlights just how important protecting computer and data networks have become.

The modern world's reliance on computer networks grows more interconnected every day. From smartphone adoption and email to digital banking and credit cards, it seems that we use the web for more things than ever before. This extends into infrastructure that is essential to our economic security, such as power grids and water-treatment plants. At the end of the day, that means more data breaches and hacking attempts.

For investors, the growth in cyber security could be one of the biggest long term plays of the decade.

A Big Issue

Assaults by criminals, terrorists and various "hacktivists" on our nation's computer systems continue to rise at a rapid pace. During 2012, almost every industry - from banks such as PNC Financial (NYSE:PNC) and entertainment companies like Sony (NYSE:SNE) to even government departments - were hacked or breached and vast amounts of data were siphoned off from company networks. A recent study from the Open Security Foundation and Risk Based Security revealed, 2012 saw a record-breaking number of reported data breaches. Data from the brief showed that more than 2,600 data breach incidents were reported. That’s more than twice the total number of data breaches reported in 2011.

However, it doesn’t just end with data breaches.

The Department of Homeland Security has been responding to intrusions on oil pipelines and electric power grids at "an alarming rate," according to its own data. Some 198 attacks on the nation's critical infrastructure systems were reported to the agency in 2012- a 52% increase over 2011. Unlike the data breaches- which are like done to steal information- these hacks were done specifically to harm or incapacitate the infrastructure. Energy giant BP (NYSE:BP) recently reported that it regularly receives nearly 50,000 hacking attempts a day.

These are serious issues considering how important computers and networking are to our lives.

That’s why Congress at the beginning of the year included several cyber security statutes in this year’s version of the National Defense Authorization Act (NDAA). That includes the Department of Defense to adopt next-generation cyber defenses, along with regular reporting to Congress about its cyber efforts. Likewise, private spending on cyber security continues to grow as well.

A Big Investment Opportunity

Given just how pervasive cybercrime is becoming, investors should cash in on the trend. The broad-based iShares Dow Jones US Aerospace (NYSE:ITA) could be used as proxy for the defense sector as many of the largest contractors like Lockheed Martin (NYSE:LMT) have begun stepping up their data security products. However, the “best bang for your investment bucks” could be in individual tech firms.

Some of the best lie in the trio of Symantec Corporation (Nasdaq:SYMC), Fortinet (Nasdaq:FTNT) and Palo Alto Networks (Nasdaq:PANW).

Odds are you’re pretty familiar with Symantec’s major- Norton Antivirus. However, about two-thirds of sales come from software for businesses and large organizations. That number continues to grow as more enterprise-sized firms shell out some big dollars for data security. New innovative products in the mobile space- like its Nukona software suite- along with ongoing restructuring initiatives will help drive positive revisions to margins, earnings and cash flows. Those efforts seem to be working as Symantec will begin paying a dividend.

Fortinet (Nasdaq:FTNT) provides a system of unified threat management and all-around protection. By using Fortinet's products, customers save money and get an all-in-one protection, rather than piece-mealing several systems. That unified security suite across datacenter and cloud applications seems to be working as the firm continues to rack up customers around the globe.

Finally, founded by Checkpoint Software (Nasdaq:CHKP) alums, Palo Alto Networks (Nasdaq:PANW) is quickly winning over customers with its security products. The enterprise firewall market is set to grow about 11% this year and Palo Alto has been quite successful at gaining market share despite being a new company. PANW has been able to win about 85% of the contracts it bids on.

The Bottom Line

As computers, cloud computing and data networks continue to be a part of our everyday lives, protecting them is quickly becoming a hot button issue. That certainly bodes well for the firms in the cyber security market. For investors, betting on these firms could be one of the biggest plays over the next few years.

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