Does Your Portfolio Need A Dose Of Cybersecurity?

By Aaron Levitt | June 09, 2014 AAA

Computers. You can hardly do anything these without using one. Heck, even your toaster oven has become a complex mix of semiconductors and circuit boards. While this reliance on technology has made our lives easier, it does create a huge problem.

Just about everything we do is now vulnerable to sophisticated hackers. (For related reading, see The Underground Internet Economy Of Cybercrime.)

As our data moves to the cloud and our electric grid becomes smart, securing all the networks of the world will be a major task. Analysts estimate that billions must be spent to keep up with increasingly sophisticated attacks and ever-evolving threats. For investors, companies involved in protecting that critical data could be worthy long-term plays.

Huge Hacker Costs

Recent data breaches at places like retailer Target Corp. (TGT) and online auction site eBay Inc. (EBAY) highlight the fact that no one is immune to computer-related crimes by criminals, terrorists and various "hacktivists." Recent data show that cyberattacks on companies increased by nearly 42% in 2012 over the previous year, while a recent report from International Business Machines Corp. (IBM) showed that the average firm suffers 1,400 cyberattacks and 1.7 incidents per week. The tech firm defines an “incident” as an attack that serious enough to warrant some sort of investigation from security personnel. All told, these cyber intrusions cost companies $1 trillion a year. (For related reading, see Cybercrime The Newest National Threat.)

And that number could be a drop in the bucket compared to possible future issues.

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, such as power grids and water-treatment plants, that are essential to our economic security. Analysts predict that attacks and incidents will only rise as we get more connected. (For more on this topic, see 6 Ways To Protect Yourself Against Cybercrime.)

Securing all this data and infrastructure will cost a pretty penny.

According to research firm Gartner, companies are projected to spend roughly $67 billion on information security this year. That number is set to balloon by 39% to $93 billion by 2017. Meanwhile, U.S. Federal government cybersecurity spending is set to grow to $65 billion by 2020. All of these spending estimates don't include the rest of the world or individual citizens spending on antivirus software and other cybersecurity efforts.

All in all, that’s some serious spending that will result in some serious profits for the companies in the sector.

Profits in Preventing Attacks

For investors, given the need for greater cybersecurity spending, the time to bet on the major players could be now. And great way to play the trend is through the iShares U.S. Aerospace & Defense ETF (ITA). Many of the largest defense contractors like Lockheed Martin Corp. (LMT) and Raytheon Co. (RTN) have been stepping up their efforts in the cybersecurity arena. With ITA tracking 38 different contractors, it could be worthy, diversified play. However, some of the more exciting opportunities could lie in individual stocks.

The behemoth in the industry is Symantec Corp. (SYMC). While it’s best known for its Norton suite of antivirus software, SYMC has been expanding into mobile and Bring-your-Own-Device (BYOD) security options as well as enterprise software for hacker prevention. While Norton still provides the bulk of its revenues, these other options should help push-up stagnating profits and SYMC’s stock price.

For those investor’s looking at the next big things in cybersecurity, both Palo Alto Networks Inc. (PANW) and FireEye Inc. (FEYE) could be it. PANW is quickly gaining market share in the enterprise firewall market. Aside from recently winning a patent legislation lawsuit, analysts predict that PANW will see significant growth overseas, while subscription services will increase the company's revenue by about 10%. And FEYE has recently developed new software that scans networks for malicious code after it passes a system's first line of defense. That’s important because antivirus software now only manages to trip up hackers about 45% of the time.

Finally, it’s not just the defense contractors or tech-upstarts that are getting into the cybersecurity game. Both General Electric Co. (GE) and Cisco Systems Inc. (CSCO) could be big winners. Both have purchased smaller tech firms in order to add data security to their network of products. GE’s infrastructure and industrial products are especially at risk from malicious threats.

The Bottom Line

The number of cyberattacks continues to grow and should only get worse as the world becomes more networked and our lives become more technologically connected. That means the time could be right for investors to add a dose of cybersecurity to their portfolios.

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