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How to Invest in the Cyber Security Industry


You know the risks, you have heard the stories.  Cyber hacking is almost a daily event these days.  From foreign nations to kids on their home pc, criminals are trying to break into the nations largest databases that store your personal data.  Maybe you have already been hit.  Its possible if you file your taxes (IRS), shop at target or Home Depot, or use the health insurers Primera Blue Cross or Anthem.  That is just a few of the companies and government agencies that have been victims of hacking.

We have talked a lot about what you can do to protect yourself against cyber hacks on our radio show, but today I wanted to talk about what publicly traded companies are developing software and hardware to fight these attacks, and how we can profit from this booming industry. 

There are many companies that operate in this space, some that were developed just for this purpose, and some that have branched out from their core business to get into this space.  Many have names you will recognize, such as:

  • BAE Systems PLC 
  • The Boeing Company
  • Lockheed Martin Corporation
  • Northrop Grumman Corporation
  • Raytheon Company
  • General Dynamics Corporation 
  • Booz Allen Hamilton Inc
  • International Business Machines Corporation (IBM)
  • Hewlett Packard Company
  • Dell Inc 
  • Cisco Systems Inc 
  • Intel Corporation
  • Symantec Corporation 

There are also a host of other small and mid-cap companies that operate in this space that you have probably never heard of. 

One strategy to invest in this industry is to buy in to any one of those stocks or several of them and hold them in hopes that they outperform the rest of the market by innovating new and better products than their peers.  The odds that you pick the “right” stock is pretty low, even if you do some cash flow analysis and try to pick the most undervalued stock with the highest growth potential.  There is a very real chance that if you do this that one of their competitors will out-innovate them, land a huge contract that they don’t, or they will lose a key management person to a competitor.  All of these business risks are real when you buy an individual stock.  Remember these types of risks aren’t market risks, they are individual company risks. 

The other problem with this strategy is that the companies that operate in this space (and any other space for that matter) that are most likely to see the greatest growth are the small cap companies.  The reason for this is that they are more nimble, they are often companies that have been started by the best and brightest minds that focus on that industry, and they are, in general, able to change, adapt, and react much more quickly to changes in the industry than large companies are.  Ironically, it is this same ability to change and react that makes these stocks much more risky than the large-cap, big name companies.  Additionally, they will have much less publicly available information, which will make it more difficult to research and analyze what their growth potential is.

So, to sum all of that up, the odds that you are going to go out and pick the biggest winner of the next year, 2 years, or 5 years from an entire sector of publicly traded companies is very low.  So how do you make money?

The best way to profit in a sector while limiting your individual company risk is to buy a broad range of stocks in that sector and hold them all in smaller portions.  That way, if you buy a couple of small cap losers that go bankrupt, it only represents a modest percentage of your portfolio in that sector.  Conversely, if you increase your chances of picking up the few companies that will outperform the rest of the sector and really hit it big.  There are two ways to assemble a portfolio like this. 

The first is to go out and identify every company that operates in this sector and purchase a small amount of it.  This is an easy thing to accomplish.  You will incur astronomical trading costs, you will put in hours of unnecessary research, and most likely, you will still make a few mistakes. 

The second is to buy and ETF (Exchange traded fund) or Mutual Fund that covers the sector.  Lucky for you if you are interested in buying into the Cyber Security Sector, a fellow Tulane Graduate named Andrew Chanin launched a Cyber Security ETF about 8 months ago, and it has already accumulated over $1 Billion in investor money as of late June.  The ETF trades under the ticket HACK, is operated by Andrew’s company PureFunds.  It has attracted the attention of such industry experts as Ric Edelman, which helped it gain investor money that quickly. 

The fund holds 31 stocks, some of which operate solely in the cyber security are, and some that are bigger tech companies that are not 100% focused on the space.  This is not to say that the ETF is without risks.  The price to earnings ratio of the fund is over 660, which is extremely high.  This is not unusual when you have stocks held in the fund that are small and micro cap, but it is high for an ETF. 

Full disclosure I hold a small amount of this ETF personally (at the time I wrote this), and I am certainly not making a recommendation that everyone reading this should go out and buy it.  Rather, it should be considered only as part of a balanced portfolio, and you should consult your fee only investment advisor before making any investment.