Are Cybersecurity Stocks Falling Out of Favor With Hedge Funds?

A high number of companies and governments across the globe have been channeling vast amounts of capital into their corporate technology budgets in an attempt to keep their names out of high-profile security-breach headlines. Scandalous high-profile hacks usually serve as a trigger or a reminder to most companies to spend even more capital on security. However, cybersecurity valuations have been smacked-around earlier this year due to worries about high valuation metrics, competitive threats, as well as decelerating enterprise spending. Nonetheless, growth in cybersecurity spending will most likely keep growing in the years ahead, as cybersecurity is seen as one of the biggest concerns in today’s environment, so security will continue to be a top priority in companies’ technology budgets. Having this in mind, let’s have a look at the hedge fund sentiment towards five favorite cybersecurity stocks to get an idea about how the smart money industry feels about the highly-important cybersecurity segment.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5. Fortinet Inc. (NASDAQ:FTNT)

– Investors with long positions as of March 31: 27

– Aggregate value of investors’ long positions as of March 31: $274.55 Million

There were 27 hedge funds tracked by Insider Monkey with long positions in Fortinet Inc. (NASDAQ:FTNT) at the end of the March quarter, as compared with 25 funds recorded three months earlier. Meanwhile, the overall value of those long positions rose to $274.55 million from $201.86 million during the quarter. The 27 funds invested in the provider of cybersecurity solutions amassed roughly 5% of its outstanding common stock. The network-security company has seen its market value gain nearly 11% since the beginning of 2016, partly owing to the stronger-than-expected first-quarter earnings report. Fortinet’s revenue for the first quarter of the year grew 34% year-over-year to $284.58 million due to greater sales volumes in its FortiGate product family. The company is also accelerating the pace of hiring and investments to expand its sales coverage, marketing capabilities, as well as develop new products, which resulted in a 43% increase operating expenses. Steven Cohen’s Point72 Asset Management acquired a new stake of 757,400 shares of Fortinet Inc. (NASDAQ:FTNT) during the March quarter.

#4. FireEye Inc. (NASDAQ:FEYE)

– Investors with long positions as of March 31: 28

– Aggregate value of investors’ long positions as of March 31: $280.40 Million

FireEye Inc. (NASDAQ:FEYE) also received some love from the hedge funds monitored by our team, as the number of asset managers with equity investments in FireEye climbed to 28 from 25 during the first quarter. Similarly, the aggregate value of those equity investments grew to $280.40 million from $243.88 million recorded at the end of December. Approximately 9% of the company’s outstanding shares were hoarded up by the 28 managers tracked by Insider Monkey. The shares of the business security software specialist are down 24% thus far in 2016, as the company’s mixed first-quarter financial results and leadership changes have weighed on the stock. FireEye’s revenue skyrocketed from a mere $11.8 million in 2010 to $623.0 million in 2015, which represents a compounded annual growth rate of roughly 121%. This exceptional revenue growth cannot remain at this elevated level unceasingly as FireEye’s revenue base goes higher. The company anticipates total revenue in the range of $780 million to $810 million for 2016, so the top-line growth is indeed decelerating. Israel Englander’s Millennium Management owns 1.04 million shares of FireEye Inc. (NASDAQ:FEYE) as of the end of March.

#3. Juniper Networks Inc. (NYSE:JNPR)

– Investors with long positions as of March 31: 29

– Aggregate value of investors’ long positions as of March 31: $515.89 Million

The hedge fund sentiment towards Juniper Networks Inc. (NYSE:JNPR) declined notably in the first quarter of 2016, as the number of funds from our extensive system with stakes in Juniper dropped to 29 from 35 quarter-over-quarter. The value of hedge funds’ stakes in the networking products company dropped significantly to $515.89 million from $957.81 million quarter-over-quarter. Although Juniper Networks is not a pure-play information security company, it does operate in the highly-competitive security market. The company’s security product net revenue for the first quarter of the year dropped to $73.4 million from $92.8 million as a result of lower revenues from Enterprise and Cloud Providers, partially offset by higher revenues from Government. Just recently, analysts at Drexel Hamilton reduced their price target on Juniper Networks to $36 from $39 and reiterated their ‘Buy’ rating on the stock, saying that the stock still “represents an attractive value”. Juniper shares are down 16% year-to-date. Ric Dillon’s Diamond Hill Capital has 6.35 million shares of Juniper Networks Inc. (NYSE:JNPR) among its pool of holdings as of the end of March.

#2. Check Point Software Technologies Ltd. (NASDAQ:CHKP)

– Investors with long positions as of March 31: 31

– Aggregate value of investors’ long positions as of March 31: $1.15 Billion

Check Point Software Technologies Ltd. (NASDAQ:CHKP) fell out of favor with the hedge fund managers tracked by Insider Monkey during the January-to-March period, as the number of money managers invested in the information security company dropped to 31 from 33 quarter-on-quarter. At the same time, the value of those managers’ equity investments shrunk to $1.14 billion from $1.39 billion during the first three months of the year. The 31 money managers stockpiled 7% of the company’s total number of outstanding shares. Check Point Software Technologies has been successful in growing in top- and bottom-line figures in recent years, with the company’s revenues increasing to $1.63 billion in 2015 from $1.50 billion in 2014 and $1.39 billion in 2013. The company is on track to deliver stronger revenues for yet another consecutive year, as first-quarter revenues increased 9% year-over-year to $404 million. The shares of the company are 5% in the green year-to-date. Iridian Asset Management, founded by David Cohen and Harold Levy, reported ownership of 5.26 million shares of Check Point Software Technologies Ltd. (NASDAQ:CHKP) in its latest 13F.

#1. Palo Alto Networks Inc. (NYSE:PANW)

– Investors with long positions as of March 31: 42

– Aggregate value of investors’ long positions as of March 31: $956.00 Million

Palo Alto Networks Inc. (NYSE:PANW) also lost some of its appeal within the hedge fund industry, after the number of asset managers from our database with stakes in the company fell to 42 from 50 during the March quarter. Correspondingly, the overall value of those asset managers’ stakes declined to $956.00 million from a much higher value of $1.15 billion during the quarter. Those 42 hedge fund vehicles accumulated nearly 7% of the company’s outstanding shares. Shares of the network-security company plummeted following the release of its earnings report for the third quarter of fiscal 2016 that ended April 30 despite posting a higher-than-expected top-line figure. The downbeat outlook for the fourth quarter of fiscal 2016 was the primary disappointment for investors. The company anticipates total revenue in the range of $386 million-to-$390 million, which represents a growth of “only” 36%-to-37%. This range would mark the slowest quarterly rate of revenue growth since Palo Alto Networks went public in 2012. The disappointing outlook overshadowed the better-than-anticipated 48% year-over-year increase in third-quarter revenue, which totaled $345.8 million. Jim Simons’ Renaissance Technologies has 931,300 shares of Palo Alto Networks Inc. (NYSE:PANW) in its equity portfolio as of March 31.

Disclosure: None