Is It Time to Buy These 4 Cyber-Security Stocks?

When a particular industry isn’t performing all that well, it takes a certain type of stock market participant to invest in it; a shrewd one. After all, the key to being a successful investor is to go against the trends, rather than with them. Of course, it goes without saying that the requisite research has to be carried out before such a decision is undertaken. Cyber-security is one space that has been battered down, but the increase in cyber crime (one of the biggest cyber heists ever, a $101 million theft involving Bangladesh’s central bank and the Federal Reserve Bank of New York occurred just recently), improvement of fundamentals, and resumption of M&A activity in this area led Goldman Sachs to launch coverage on it recently with a bullish outlook. With that in mind, we decided to provide a list of the top cyber-security stocks in terms of their popularity among the top hedge funds in our database, who have carried out extensive due diligence before investing in these firms.

At Insider Monkey, we track around 785 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).

#4 Barracuda Networks Inc (NYSE:CUDA)

 – Investors with Long Positions (as of December 31): 15

 – Aggregate Value of Investors’ Holdings (as of December 31): $44.18 Million

If considering the recent stock and hedge fund action on Barracuda Networks Inc (NYSE:CUDA), it would seem that the company is thriving. The firm’s stock price appreciated by about 20% during the fourth quarter, while the number of hedgies invested in the company rose by one and the aggregate value of their investments almost doubled. However, a slightly longer time horizon paints the picture of a struggling business. Over the last 12 months shares have cratered by nearly 60%. According to reports in early February, the data storage services provider was looking for potential buyers with the help of Morgan Stanley (NYSE:MS). Although a bit speculative, this could serve as a strong play for investors, especially considering the company’s low stock price. According to a recent 13G filing, Ahmet Okumus‘ Okumus Fund Management holds about 3.73 million shares of Barracuda Networks Inc (NYSE:CUDA), representing 7.03% of the company’s outstanding float.

#3 Fortinet Inc (NASDAQ:FTNT)

 – Investors with Long Positions (as of December 31): 25

 – Aggregate Value of Investors’ Holdings (as of December 31): $201.86 Million

Hedge fund interest in the $5.03 billion provider of cyber security solutions to enterprise, service providers and government organizations dropped sharply during the October-to-December period, as the number of funds holding the company in their portfolios dropped by 11 and the value of their aggregate investments slid by 46%. Although down by 16% over the last year, Fortinet Inc (NASDAQ:FTNT)’s shares have risen by more than 5% since the end of January, when the company delivered financial results for the fourth quarter that included EPS in-line with estimates and revenue that beat expectations. Furthermore, solid guidance for the full 2016 fiscal year and a $200 million share buyback program provided further impetus to the stock price. Anand Parekh‘s Alyeska Investment Group initiated a position in Fortinet Inc (NASDAQ:FTNT) during the fourth trimester of some 1.36 million shares.

The top two cyber-security plays are revealed on the next page.

#2 FireEye Inc (NASDAQ:FEYE)

 – Investors with Long Positions (as of December 31): 25

 – Aggregate Value of Investors’ Holdings (as of December 31): $243.87 Million

During the fourth quarter, the number of hedgies long FireEye fell by 12 and the value of their aggregate investments dove by 36%. Although down by more than 55% over the last year, FireEye Inc (NASDAQ:FEYE)’s stock has started to embark on an upward trend and the company further trimmed its loss per share expectations for 2016 during its recent Analyst Day. Piper Jaffrey recently upgraded the company to ‘Overweight’ from ‘Neutral’, as it believes FireEye will successfully transition to an ‘As-a-Service’ model, as well as in the company’s ability to drive international expansion. FireEye was also recently hired by the Bangladesh central bank to investigate the latest heist that it fell victim to. Millennium Management, which is led by Israel Englander, hiked its FireEye Inc (NASDAQ:FEYE) holding by 92% to 1.43 million shares during the fourth trimester.

#1 Palo Alto Networks Inc (NYSE:PANW)

 – Investors with Long Positions (as of December 31): 50

 – Aggregate Value of Investors’ Holdings (as of December 31): $1.15 Billion

Collectively, hedge funds in our database hold about 7.6% of Palo Alto Networks Inc (NYSE:PANW) outstanding float. While the security company’s stock price rose by 2.4% during the fourth quarter, the number of investment managers bullish on it increased by three and the aggregate value of their Palo Alto holdings rose by 26.4%. Analysts at Bernstein believe that the services that Palo Alto is offering, which include integrated security solutions involving next generation firewalls and end-point security, are much more advanced than the old point-based defense systems that other firms are offering. This is reflected in Palo Alto’s rapid growth, as it is capturing 43% of the market growth. Hence, Bernstein has set a price target of $200 for the company, which suggests upside of 29% from current trading levels. Jim Simons’ quant fund Renaissance Technologies boosted its stake in Palo Alto Networks Inc (NYSE:PANW) by 116% to 1.36 million shares during the fourth quarter.

Disclosure: None