Finding Value In Cyber Security

by: Justin Jaynes

Prior to reading this article, I suggest spending a few minutes researching cyber attacks in the U.S. states that "the proportion of data in the digital universe that requires protection is growing faster than the digital universe itself, from less than a third in 2010 to more than 40% in 2020." Defending from cyber attacks is challenging. To properly do so, you have to ensure that your system has no holes in security. For a successful attack, a hacker is only required to find one hole that can be exploited in your system's defense.

An article in The Oakland Press explains just how some of these attacks take place. For example, in a recent attack launched on a bank, hackers used denial of service attacks as a head fake of sorts. While the bank was fighting that attack, hackers stole account information, committing an e-robbery totaling around $9 million in a couple hours. In this article published on The Motley Fool, notice that just the first four banks on the list have assets totaling to approximately half of our National Debt. That's only one sector requiring cyber security. Think about all the information you have stored in your account, or even your Papa John's account: credit card numbers, phone numbers, address, etc. How much is the security of this data worth?

In my opinion, I feel that Internet security has a unique niche in the market. With all the data stored in the cloud, and that amount of data increasing every year, there is no easy way to reduce cyber security spending. Say, for example, the economy worsens, people lose jobs, consumer sentiment goes down, etc. Are companies that have all of this information stored in cloud servers and Internet accessible databases going to be able to spend less on security, when the amount of information and the sensitivity of that information is going up, given the increase in frequencies of these attacks?

I originally set out with the intention to write an article on cyber security ETFs, but most of the ETFs I could find were too broad. Symantec (NASDAQ:SYMC) CEO Steve Bennett was discussing his company's earnings report, and in this discussion included his insight into the increased cyber attacks in the U.S. That gave me the idea for this article, and while researching I came across an article from RS Analytics, a Seeking Alpha author. His article outlines several stocks in the cyber security sector and why he feels they're suitable picks, and he recommends holding a basket of these stocks to increase your overall market exposure.

There may be stronger candidates out there, but the stocks I present are more of a jumping off point to increase your exposure to the cyber security subsector. All except EMC Corp. (EMC) have P/Es below their sector average. This isn't always a good thing, but can signal stocks selling at a better value than, say, VMware (NYSE:VMW), which has a very high P/E relative to the industry. VMware may be a very strong company, but its higher stock price may not allow investors on a more modest budget to invest in multiple companies.

The main criteria for the companies I outline below ones that can be bought for less than $30 a share, to give options to investors on a budget or those looking to gain exposure to the increased need for cyber security over the long term. There might be better candidates out there, and I welcome any comments with feedback on other companies investors could consider. Investors should always perform their own due diligence; I'm merely providing these as examples of where to look.

As a point of reference, the PowerShares QQQ ETF (NASDAQ:QQQ), PowerShares Dynamic Software Portfolio ETF (NYSEARCA:PSJ), and Technology Select Sector SPDR ETF (NYSEARCA:XLK) are all within one percentage point of their respective 52-week highs at the time this article was written. The technology sector has a P/E of 20.2, with the computer storage industry at 16.3.

1. Symantec

Taken from Google Finance:

Symantec Corporation is a global provider of security, storage, and systems management solutions that help businesses and consumers secure and manage their information. The Company has five operating segments: Consumer, Security and Compliance, Storage and Server Management, Services, and Other. The Company conducts the business in three geographic regions: Americas, which consist of the United States, Canada, and Latin America; Europe, the Middle East and Africa (EMEA), and Asia Pacific Japan (APJ). It also maintains important relationships with a number of original equipment manufacturers (OEMs), Internet service providers, and retail and online stores. On June 24, 2011, the Company acquired Clearwell Systems Inc. On January 13, 2012, the Company acquired LiveOffice LLC. In March 2012, the Company sold 49% stake in Huawei Symantec Technologies Co., Ltd. (Huawei Symantec) to Huawei Technologies Co Ltd. On April 2, 2012, it acquired Nukona, Inc.

  • 52-Week Range: $13.05 to $25.26
  • Market Cap: $16.7 billion
  • Dividend: 2.45%
  • P/E: 15.4x

Why I like it: Symantec is somewhat of a household name. It also pays a dividend -- $0.15 per share per quarter currently. Compare that to Microsoft (NASDAQ:MSFT), which was recently trading at $33 per share with a dividend yield of 2.79%.

2. Radware (NASDAQ:RDWR)

From Google finance:

Radware Ltd., develops, manufactures and markets integrated networking solutions. The Company's solutions include both Application Delivery and Network Security solutions. Its products and activities are focused on delivering availability, performance and security to enterprises' and carriers' data centers. The Application Delivery solution domain consists of simple load balancing application switches (Layer 4-7). The Network Security solution domain consists of firewall/Virtual Private Networks (VPN), Unified Threat Management (UTM), intrusion detection systems, intrusion prevention systems, network behavioral analysis (NBA) systems and Secure Sockets Layer/ Internet Protocol Security (SSL/IPSec) VPN appliances. During the year ended Dec. 31, 2011, it released the VADI 2.0 offering, a ADC Fabric solution extending itsVADI support for Virtual Data Centers and accelerated Application deployment. In 2011, it released Alteon 10000 chassis base solution and Alteon 5224 platform.

  • 52-Week Range: $13.38 to $20.42
  • Market Cap: $686 million
  • Dividend: N/A
  • P/E: 5.6x

Why I like it: Radware is a tiny company. Since Q3 2011, it has posted quarterly EPS that have beat or met expectations until the most recent quarter. And this last part is pure speculation -- I have seen nothing official. RDWR is a great candidate for an acquisition by a larger firm. Read the first page of the Seeking Alpha Earnings transcript; RDWR has no debt, $278 million in assets, and even mention a share buyback program to return value to shareholders. To put it in perspective, its assets (including cash/short term/long term, etc.) currently equal about 40% of its market cap.

3. Cisco (NASDAQ:CSCO)

From Google Finance:

Cisco Systems, Inc. designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use. It provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. It has five segments: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. The Emerging Markets theater consists of Eastern Europe, Latin America and Russia and the Commonwealth of Independent States. In December 2012, the Company acquired Meraki, Inc. Effective Jan. 31, 2013, the Company acquired Cariden Technologies Inc. Effective Feb. 13, 2013, the Company acquired BroadHop Inc. In February 2013, it acquired Intucell.

  • 52-Week Range: $14.96 to $21.98
  • Market Cap: $111.1 billion
  • Dividend: 3.28%
  • P/E: 12.0X

Why I like it: Of the companies I have looked at, Cisco has the largest market cap and the highest dividend yield, giving it potential as a decent long-term investment. Also, recently Cisco has completed several acquisitions to widen its company moat.

4. EMC Corp.

From Google Finance:

EMC Corporation and its subsidiaries develop, deliver and support the Information Technology industry's range of information infrastructure and virtual infrastructure technologies, solutions and services. The Company manages its business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure. EMC Information Infrastructure provides a foundation for organizations to store, manage, protect, analyze and secure ever-increasing quantities of information, improve business agility, lower cost of ownership and enhance their competitive advantage within traditional data centers, virtual data centers and cloud-based IT infrastructures. Its EMC Information Infrastructure business consists of three segments: Information Storage, Information Intelligence and RSA Information Security. In March 2012, the Company acquired Pivotal Labs. In May 2012, the Company acquired XtremIO. In May 2012, the Company acquired Syncplicity, Inc.

  • 52-Week Range: $21.45 to $28.18
  • Market Cap: $48.5 billion
  • Dividend: N/A
  • P/E: 18.7x

Why I like it: EMC owns a large stake in VMWare, but trades at a much lower multiple. It also has product lines that directly relate to cyber security.


I've been a bit long winded here, but I wanted a chance to make the case as to why investment into equities that provide exposure to a growing cyber defense market has the potential to perform well. Again, the stocks I have outlined above are fairly cheap on a per share price, as well as being further percentage points off their highs than the market as a whole right now. And, with the exception of EMC, they have P/E multiples cheaper than industry averages.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO, RDWR, EMC, SYMC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.