Trade Alert: New basket of security stocks

You’ve all seen the headlines and many of you have been victimized by the exploding world of hacking. Target, Best Buy, American Express, ApplePay — they’ve all been in the headlines lately for being on the wrong side of hackers who steal their customers credit cards, identities and other nefarious (and more important to us) very expensive attacks on the world cyber networks.

I spoke with several executives at banks like JP Morgan and Goldman and other places about this issue in the past, say, five years ago, and they all gave the concept of network security lip service, but the spending wasn’t quite there yet. Now, in 2015, you can’t watch a single interview with any of these banking or retail executives in which network security questions don’t come up. And the answers from these people are now full of actual facts about how much they’re spending and increasing their spending on network security.

Bank of America, Citigroup, Target, Wal-Mart, Apple, Amazon — these guys are spending huge sums proactively trying to secure their networks and the spending is clearly on the rise. If you can upgrade your network for a few tens of millions of dollars and that improved network will save your hundreds of millions of dollars in better security, less theft, less fraud, etc over the next five to ten years, it’s clearly a value proposition for these companies at risk too.

Over the next ten years, consumers and companies will be fighting surveillance, espionage, theft, fraud, and still unforeseen threats to their networks from kids in basements, global mafia circuits, fringe governmental regimes, and even from other developed nation’s governments fighting each other covertly using cyber warfare. The magnitude of these threats and the impact these crimes have on society grows exponentially every year as all of in the connected world are more connected cyber-speaking at least, all the time. Our lives, our money, our records, our entertainment, our communication, our education — they all happen increasingly online, on apps and in the digital world.

Here are a few names to familiarize yourself with in the industry. LIFE, CUDA, CHKP, SYMC, CYBR, VDSI.

And here are the three names I’m starting with for our basket of security stocks:

FFIV – I owned this stock for many years and have made a lot of money over that time, but I haven’t had it on my sheets lately. I’m changing that today, as FFIV’s ability to, as they put it: “develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems” is second to none and unlike most cybersecurity stocks, it’s highly profitable already. F5 should earn upwards or $8 per share next year and that gives it a P/E of only 13 right now. Meanwhile this is a company that will grow its revenues this year 15% or more.

SPLK – This company is both a “Big Data” and security play. Splunk helps companies figure out how to analyze, protect, and use their data. It’s far from cheap, trading at 10x next year’s revenues and 200x next year’s earnings. That said, the company is growing nearly 40% per year and those are very high margin revenues — and long-term in nature as once a major company starts using Splunk’s apps and software and analytics, they rarely leave.

PANW – This is one of the purest plays on cybersecurity you’re gonna find, and it’s also one of the fastest-growing and best-run too. Here’s how the company describes itself: “Palo Alto Networks, Inc. provides enterprise security platform to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; and Threat Intelligence Cloud that offers central intelligence capabilities, as well as automated delivery of preventative measures against cyber attacks.” Now, this isn’t cheap either, as its trading at 10x revenues and 80x this year’s earnings estimates. But as I’d mentioned, this is one fast growing company, with revenues growing 50% per year last year and maybe at that pace again this year as the race to secure the world’s networks heats up.

I personally am adding twice as much FFIV as I am with SPLK and PANW. I’ll take a week or two to build up the full basket size, and combined they’ll account for what I personally consider a large “full-sized position” with FFIV making up 1/2 of the basket and SPLK and PANW at 1/4 of the basket. I’m starting with a small tranche in each and will add to it over the next week or two and will let you know in updates of course.