Is the Time Finally Right for Cyber Security Stocks?

by Jason Jenkins

All throughout 2011, we here at Investment U wrote about what we saw as a growing problem in this country: cyber-crime. Accordingly, we saw a great investment opportunity within the industry.

Fast forward to the present. Cyber stocks are finally starting to move. And the cyber-crime issue has exploded - not just in terms of domestic fraud, but it has now been elevated to national security problem No. 1.

If you don't believe me, listen to what our top national security government officials have stated since the beginning of the year…

The New Global Threat

  1. On January 2, 2013, Congress included several targeted cyber security statutes in this year's version of the National Defense Authorization Act (NDAA). The $633 billion package approved for fiscal year 2013 demands the Department of Defense adopt next-generation cyber defenses, along with regular reporting to Congress about its cyber efforts.

  1. The U.S. intelligence community's annual review of worldwide threats for the first time ever ranks the "growing risk of computer-launched foreign assaults on U.S. infrastructure, including the power grid, transportation hubs and financial networks" higher than the "worries about terrorism, transnational organized crime and proliferation of weapons of mass destruction."

  1. In the same week of the review's announcement, the President's national security advisor, Thomas Donilon, stated in a speech at the Asia Society in New York, "Cyber-intrusions emanating from China are on an unprecedented scale." Donilon went on to say that the China-based cyber attacks on U.S. entities are now "a key point of concern" for the Obama Administration.

  1. General Keith Alexander heads up the Pentagon's new U.S. Cyber Command. The Cyber Command conducts military operations in regards to digital espionage abroad. In yet another Congressional hearing before the Senate Armed Services Committee, the General stated the number of attacks is increasing. He cited there were more than 140 attacks on Wall Street over the last six months.

I think you get the picture. Any part of the government involved in the defense of our country is sounding the alarm that the problem is real and that the government will do whatever is necessary to combat cyber-crime.

The Purest Play on Cyber Security

If you want the purest play on the cyber security market, you want to look at Symantec (Nasdaq: SYMC).

The company provides internet security technology and software to everyday persons, corporate entities and governments. Symantec seems to be best positioned for all the Federal government's tough talk on cyber terrorism.

The Federal government's focus on security will rise above sequestration and budget cuts to defense. The strong rhetoric will be based in action - and that means funding. This area will not be hurt but, more likely, will see expansion.

What we can concur on is that there will be across-the-board upgrades commercially and in the government. Analysts have raised growth estimates for cyber security in 2013 from the high single digits to the low teens.

Symantec delivered another quarter where it beat EPS and revenue estimates. In fact, this was the third quarter in a row where there was an earnings beat of at least 15%. The company is a leader in the IT security market and normally rolls out new mobile security products.

Symantec has made some changes from restructuring, to a new CEO, to share repurchase programs. And with this environment, there's no reason not to believe this should help the company's bottom line. As far as its competitors are concerned, Symantec's current P/E multiple seems to be at a discount.

Obama Sets New Standards

Here's another play in the cyber security landscape that takes advantage of an executive mandate straight from President Obama himself.

Don't know if you heard about this, butback in November the White House put out new minimum standards so that agencies can protect themselves against insider security threats. It was breaches of this sort that led to the WikiLeaks scandal in 2010.

The memo instructed government agencies to adopt programs that would deter internal threats such as espionage, attacks against the government, and the leaking of sensitive data contained on government networks and systems. Specifically, the program has to have:

  • "The ability to gather, integrate and centrally analyze and respond to key threat-related information."

  • "The ability to monitor employees' use of classified networks."

  • "Insider threat awareness workforce training."

  • "Protections of civil liberties and privacy of all personnel."

Who's Taking Advantage?

I wanted to list what these standards were so you could see how one company specifically tailored software to accommodate every aspect of the mandate.

In accordance with the memorandum, Raytheon Company (NYSE: RTN) introduced its SureView Version 6.7 program to support Federal agencies. Raytheon is a technology and innovation company specializing in defense and homeland security around the globe.

The main objective of SureView is to implement an insider threat detection program to combat such threats to national security, while also protecting privacy rights.

The program is an information-protection solution that recognizes and supports investigations on users throughout the course of a project. SureView aids in shielding government information while controlling insider threats. It utilizes an integrated and enterprise-wide system that can efficiently determine unauthorized access to information and/or the transfer of that information.

Get in before everyone else does. For the past couple of years, revenue has been flat, with net income rising about 1.5% annually.

Very recently, as should be expected, the stock has shown some life as investors begin to realize Raytheon is in a good place to take advantage of President Obama's memo.

And just as in the case of Symantec, the increased spending to fight cyber-crime will bode well for Raytheon.

Good Investing,


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