Profiting from the Cybersecurity Pain Point

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

One of the big investing mantras is to buy what you know. That has certainly worked out well, but I would contend there are several pain points that offer fantastic investing opportunities that you don’t have to experience. Do we need to live in California to understand the importance of water in our everyday lives? Probably not.

There are some pain points that are growing in size and scope, but to be honest, I hope that you don’t experience this one in particular — not at all.

Let me explain…

A new report from cybersecurity company Symantec (SYMC) purports that cyber attacks surged by 40% in 2014. That’s hardly a shock, given the near-pervasive attention these attacks receive in the headlines. What caught my eye is how the attackers are getting ever more sophisticated. This was something I shared with subscribers of The Growth & Dividend Report several months back, following my conversations with a number of public and private cybersecurity companies.

Per Symantec’s annual Internet Security Threat Report, highly organized and increasingly well funded and multinational operations pulled off 312 major breaches against companies last year, up 23% vs. 2013. A recent survey by the Ponemon Institute showed the average cost of cyber crime for U.S. retail stores more than doubled to $8.6 million in 2014 compared to 2013. On the cost side of the equation, the annual average cost per company that was the victim of a successful cyber attack increased to $20.8 million in the financial services industry, $14.5 million in the technology sector and $12.7 million in communications industries.

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If you’re wondering about individuals, well, it’s sad to say we didn’t fare too well, either. Symantec found that 60% of all email is spam, but the silver lining is most email systems filter much of it out. One out of every 965 emails was a phishing attack, meaning an email that includes an attachment or link which, when opened, infects the victim’s computer. Digital extortion, better known as ransomware, also continues to grow. If you’ve not heard of this, cyber thieves hijack victims’ systems and lock up their data, then demand a ransom, usually between $300-$500, to unlock it. According to Symantec’s findings, these attacks more than doubled, with 8.8 million attacks in 2014, up from 4.1 million in 2013.

While the details are perhaps a little different than you expected, there is no doubt that cyber attack pain continues to grow. According to J. Moore Partners, global cybersecurity spending is expected to surpass $76 billion this year, representing nearly a 10% three-year compound annual growth rate (CAGR). The government also plans to spend some $65 billion during the next five years on cybersecurity.

Given the vector and velocity of that forecast — up and big, as it were, which makes cybersecurity a near-predictable growth industry — we’re seeing companies in the space making moves to improve their product and technology portfolio. Earlier this week, Raytheon (RTN) agreed to buy cybersecurity provider Websense from P-E firm Vista Equity Partners for $1.9 billion, including debt. Two of the most notable acquisitions in 2014 were FireEye’s (FEYE) purchase of Mandiant and Palo Alto Networks (PAWN) acquiring Cyvera. Meanwhile, Lockheed Martin (LMT) acquired Industrial Defender last year as IBM (IBM) bought CrossIdeas and Lighthouse Security Group.

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To me, the prospects of continued cyber spending and the likelihood of more mergers and acquisitions (M&A) activity in the space mean cybersecurity stocks need to be a part of your portfolio. We own them in the Thematic Growth Portfolio I manage for Fabian Wealth Strategies, and Growth & Dividend Report subscribers have owned Cisco Systems (CSCO) in the past and profited handsomely. We currently own LifeLock (LOCK), which has climbed pretty steadily during the last month, rising 3.1% compared to the 0.4% drop in the S&P 500. I continue to like LOCK shares, but I’m also planning on using any volatility in the current earnings season to carefully add to our Safety & Security holdings with another position.

NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.

In case you missed it, I encourage you to read my e-letter column from last week about the opportunity presented by the battery life pain point. I also invite you to comment in the space provided below.

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387% gain — Smith & Wesson
103% gain — Facebook
76% gain — Nike
182% gain — VISA
275% gain — HCP

All told, Chris closed a whopping 84 double- and triple-digit percentage gains in 2014.

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