What Hedge Funds Think of These Five Cybersecurity Stocks

The cybersecurity sector has had a wild ride in 2015. The numerous hack attacks that took place in late-2014 and early-2015 helped push cybersecurity stocks to the stratosphere during the first half of the year, but the tide reversed in the second-half of 2015 and several stocks from the sector are now trading flat or in the negative for the year. In mid-June the PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) was trading with year-to-date gains of over 30%, but since then it has lost all those gains and currently trades down almost 3% year-to-date. Taking into account that most cybersecurity stocks have now cooled off and are trading at lower prices, we at Insider Monkey thought of compiling a list of cybersecurity stocks based on their relative popularity among hedge funds and thereby make the process of stock selection easier for our readers who are thinking about going long the industry. Read further to know what hedge funds thought of the five prominent players in the cybersecurity industry going into the fourth quarter.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. S&P 500’s 49% gain) over the last 37 months (see the details here).

#5 Barracuda Networks Inc (NYSE:CUDA)

-Hedge Funds with Long Positions (as of September 30): 14

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $22.3 million

Barracuda Networks Inc (NYSE:CUDA) remained largely flat during the first-half of the year, but the disappointing quarterly numbers the company released in July and September caused its stock to slump hard and it now trades down almost 50% year-to-date. This underperformance weighed heavily on the stock’s popularity among hedge funds during the third quarter with two fewer funds, among the 730 we cover, reporting a stake in the company at the end of the third quarter and the aggregate value of investors’ holding in the company seeing a decline of nearly 32% during the same period. On November 1, analysts at BWS Financial initiated coverage on the stock of Barracuda Networks Inc (NYSE:CUDA) with a ‘Buy’ rating and $26 price target, which represents a potential upside of over 40% from the stock’s current trading price. Anand Parekh‘s Alyeska Investment Group made a 30-fold increase in its stake in Barracuda Networks to 338,555 shares during the July-September period.

#4 Fortinet Inc (NASDAQ:FTNT)

-Hedge Funds with Long Positions (as of September 30): 36

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $370.6 million

Though the stock of Fortinet Inc (NASDAQ:FTNT) has fallen more than 30% since it released its last quarterly numbers in October, owing to the rise it saw during the first seven months of the year, the stock is still trading up2.5% year-to-date. The performance of the stock during the first half of the year enticed many hedge funds to go long in the stock during the third quarter. The number of funds covered by us that reported owning a stake in Fortinet Inc (NASDAQ:FTNT) increased by 10 at the end of the third quarter and the aggregate value of hedge funds’ holdings in the company also increased by almost $50 million during the same period. A few days after the company released its third quarter numbers, on October 28, analysts at Needham & Company LLC reiterated their ‘Buy’ rating on the stock, but lowered their price target on it to $43 from $54. Billionaire Israel Englander‘s Millennium Management was one of the hedge funds that initiated a stake in Fortinet during the third quarter; it purchased 464,519 shares of the company during that period.

#3 FireEye Inc (NASDAQ:FEYE)

-Hedge Funds with Long Positions (as of September 30): 37

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $384 million

FireEye Inc (NASDAQ:FEYE) has been one of the most volatile cybersecurity stock this year. While it rose almost 40% during the first-half of the year and made a yearly high of $55.33 in June, it has fallen more than 60% from that high since then. Despite this rapid decline, hedge funds didn’t lose their conviction in the stock during the third quarter. 2 more funds reported owning a stake in the company at the end of September than those who reported it at the end of June. Currently the stock of FireEye Inc (NASDAQ:FEYE) trades at 6 times trailing sales and a price-to-book multiple of 3.08, which makes it considerably cheaper than several high-profile stocks in the cybersecurity sector. Karthik Sarma‘s SRS Investment Management increased its stake in FireEye by 36% to almost 4.5 million shares during the third quarter and continued to remain the largest shareholder of the company among the funds tracked by us at the end of September.

#2 Juniper Networks, Inc. (NYSE:JNPR)

-Hedge Funds with Long Positions (as of September 30): 41

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $928.2 million

Juniper Networks, Inc. (NYSE:JNPR) has performed remarkably well in the fourth quarter, which has helped push its year-to-date gains to over 30%. However, in the third quarter – when the stock remained largely flat – the company suffered a huge drop in popularity among hedge funds. The number of funds covered by us that reported owning stake in Juniper Networks, Inc. (NYSE:JNPR) at the end of third quarter decline by 4 from those who reported at the start of it and the aggregate value of investors’ holdings in the company saw an astonishing 50% decline. Considering that the stock has performed so well in the fourth quarter, it won’t be unfair to say that most hedge funds got their bets really wrong on this one. Nevertheless, there were a few funds like Joel Greenblatt‘s Gotham Asset Management, which increased their stakes in Juniper Networks substantially during the third quarter and will be sitting on huge profits if they continue to hold on to those shares.

#1 Palo Alto Networks Inc (NYSE:PANW)

-Hedge Funds with Long Positions (as of September 30): 47

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $915 million

By virtue of being one of the best performing cybersecurity and tech stocks this year with year-to-date gains of over 52%, it’s no surprise that Palo Alto Networks Inc (NYSE:PANW) has emerged as the winner in this list. Hedge fund ownership of the company among the funds covered by us rose by two during the third quarter, while the aggregate value of hedge funds’ holdings in the company increased by almost 25%. For the third quarter of fiscal 2015 the company reported better than expected results, marking its sixth quarterly beat in a row. While the Street had expected it to report EPS of $0.32 on revenue of $284.19 million, Palo Alto Networks Inc (NYSE:PANW) declared EPS of $0.35 on revenue of $297 million. Billioanire Jim Simons‘ Renaissance Technologies made a fivefold increase in its stake in Palo Alto Networks during the third quarter and held 630,100 shares of the company at the end of that period.

Disclosure: None