Editor’s Note: Related tickers: General Dynamics Corporation (NYSE:GD), EMC Corporation (NYSE:EMC), Symantec Corporation (NASDAQ:SYMC), Morgan Stanley (NYSE:MS), Calpine Corporation (NYSE:CPN), American Tower Corp (NYSE:AMT), Check Point Software Technologies Ltd. (NASDAQ:CHKP), Fortinet Inc (NASDAQ:FTNT)
Throughout the daily news, we often run across stories of hackers stealing money electronically, or breaking into a database and lifting important information. If it was not for the companies that develop cybersecurity products, such kinds of stories may make headlines more often. In fact, in the era where IT is involved in essentially every aspect of our day-to-day lives, players like General Dynamics Corporation (NYSE:GD) and EMC Corporation (NYSE:EMC) are generating solid revenues, and can be grouped together accordingly.
An enormous potential
For example, in EMC Corporation (NYSE:EMC)’s quarterly financial report, it was revealed that the company earned about $232,300 from its RSA information security business, 12% higher than a year earlier.
Even though these numbers are relatively small compared to the overall revenue of EMC, we must heed to COO David Goulden’s words about his company’s future: “With continued steady execution, we expect that EMC Corporation (NYSE:EMC) will achieve our previously stated longer-term potential of more than $30 billion in revenue in 2016 with non-GAAP EPS growth outpacing revenue growth during this timeframe,” and it’s safe to say that cybersecurity will be a key aspect of this boom.
With regard to General Dynamics Corporation (NYSE:GD), on the other hand, we can see that according to a statement issued by the company itself, first-quarter revenue from information systems and technology, (which includes cybersecurity) amounted to some $2.4 billion.
How can we screen these stocks?
Now, investment opportunities in this space could be screened by metrics such as P/E multiples, PEG ratios, or dividend yield, among others, but one key indicator that flies under the radar is hedge fund sentiment. Empirical analysis has shown that piggyback investors can generate market outperformance if they know where to look, to the tune of 18 percentage points each year; see the details for yourself.
With that being said, we’ve compiled a list of hedge funds’ top ten cybersecurity stocks, which include EMC Corporation (NYSE:EMC) and General Dynamics Corporation (NYSE:GD), to see where the smart money is placing their capital.
1. EMC Corporation
At the end of 2012, 58 of the 450 hedge funds we track were long EMC, down from the 64 total managers that were bullish one quarter earlier. It’s interesting to note that as fund interest has declined, EMC Corporation (NYSE:EMC)’s share price has followed, dropping 11.2% in value year-to-date. Some of the most prominent hedge funds invested who have likely been peeved by this decline include Bain Capital’s Brookside Capital, Lee Ainslie‘s Maverick Capital, and Thomas Steyer‘s Farallon Capital.
As mentioned above, EMC Corporation (NYSE:EMC) outlook is especially promising in an industry that’s already trending upwards, and a forward P/E below 11.0x, shares aren’t exactly expensive at the moment.
2. General Dynamics
It’s also obvious that General Dynamics Corporation (NYSE:GD) is on this list, and some of the most notable hedgies who support this mega-defense stock include James A. Star’s Longview Asset Management, and Warren Buffett’s Berkshire Hathaway. Aggregately speaking, 37 funds were long in General Dynamics Corporation (NYSE:GD) as we headed into the start of 2013, one less than total interest in Q3. Shares have gained 6.5% in 2013, and the average Wall Street analyst expects shares to rise by another 2.5%. First quarter information systems and technology revenues of $2.4 billion are just another reason to be bullish.
3. Symantec Corporation (NASDAQ:SYMC)
Symantec, up 29.4% since the start of the year, saw 28 hedge funds invested in its shares in the latest 13F filing period, and billionaires Ken Griffin, Steven Cohen and Dan Loeb are all behind this stock. Talk about support from the smart money’s elite. Morgan Stanley (NYSE:MS) named Symantec Corporation (NASDAQ:SYMC) one of its 20 best stocks for the long-term in March, saying that the security solutions company is a “compelling turnaround story,” adding that it sports “a return to growth and margin leverage.”
In fact, while Morgan Stanley (NYSE:MS) has multiple stocks selected in industries like energy and consumer discretionary, Symantec Corporation (NASDAQ:SYMC) is the bank’s only pick in the IT sector; a stunning endorsement indeed. Of the ten sectors designated by Morgan Stanley (NYSE:MS), only IT, Utilities (Calpine Corporation (NYSE:CPN)) and Telecom (American Tower Corp (NYSE:AMT)) were limited to one choice.
4. Check Point Software Technologies Ltd. (NASDAQ:CHKP) and 5. Fortinet Inc (NASDAQ:FTNT)
Rounding out this top five we have Check Point Software Technologies Ltd. (NASDAQ:CHKP) and Fortinet Inc (NASDAQ:FTNT), each holding similar interest of 27 and 26 funds, respectively, in the latest 13F-filing period. Both companies’ stocks have been in the red in 2013 thus far, with Check Point losing 2.3% and Fortinet dropping 15.1% of its value. It’s also interesting to note that while hedge fund interest for Check Point Software Technologies Ltd. (NASDAQ:CHKP) increased by 4%, the number of managers in Fortinet Inc (NASDAQ:FTNT) fell by 13%.
When pressed to choose one out of this fourth and fifth place duo, we’d rather have Check Point Software Technologies Ltd. (NASDAQ:CHKP), which trades at a much lower earnings multiple of 12.5x, versus Fortinet’s bloated +26x valuation. While most analysts expect the latter company to experience greater earnings acceleration than Check Point Software Technologies Ltd. (NASDAQ:CHKP), it appears that investors are actually overestimating this differential. Check Point sports a PEG ratio, which measures how the market values estimated EPS growth, of 1.5—in the moderate range. Fortinet Inc (NASDAQ:FTNT), meanwhile, is over 75% more expensive.
Final thoughts
On the whole, there are many investment-related trends that readers are likely betting on over the long run. From fiber Internet to 3D printing, there are plenty of candidates for the next decade’s can’t-miss industry, but one that’s flying under the radar is cybersecurity.
Though the U.S. government’s overall level of defense spending looks set to be cut over the coming years, President Obama’s latest budget proposal for FY2014 asks for an additional $1 billion in outlays for cybersecurity up to $13 billion total. While nothing is set in stone, it’s a fairly reasonable guess that America’s next war may be fought electronically, rather than on a physical battlefield. If this were in fact the case, EMC, General Dynamics Corporation (NYSE:GD), and the rest of the stocks mentioned above would make a great cornerstone in any portfolio.
Disclosure: none
