In a perfect world, investors would gravitate toward industries as they began to outperform other industries, and savvy traders would steer clear industries that were starting to lag.
We don’t live in a perfect world.
The trading world we live in is — for better or worse — driven by stories, hence the term “story stocks.” In fact, each trading year is defined by two or three of these industry-specific stories, or themes. For instance, last year will be remembered by many as the year housing stocks recovered. And 2011’s big theme was social media stocks, like Groupon (NASDAQ:GRPN) and Facebook (NASDAQ:FB).
Although one of those fad trades has since crashed and burned (social media), both of them doled out big gains for some traders at some point during their fad phases.
The current year’s themes had been elusive, until last week, when one of 2013’s industry-based rallies hit us with all the subtlety of a pie in the face. If this fad plays out like past ones have, traders who get in early stand to ride a nice, bullish trend, regardless of whether this industry’s stocks actually do well.
And the Winner Is …
No fanfare needed — 2013’s first batch of story stocks will come from the cybersecurity realm.
In all fairness, cyberthreats aren’t a new problem. But they feel new to investors after a media-hogging catalyst last week: The first lady of the United States, Michelle Obama, became a victim of computer hacking when some of her personal financial information was accessed and exposed online.
Just to be clear, the illegally accessed information wasn’t being stored on a government-managed website. The first lady’s credit card accounts fall outside the realm of her government protection. And it wasn’t just Michelle Obama, either. Pop-performers Jay-Z and Beyonce also had personal financial information exposed in the same round of hacking.
But, if the first lady can’t be protected from these risks, what hope does anybody else have?
The unsettling news continued just a couple of days later, when an electronic billboard in Belgrade was hacked by two college students using nothing more than Apple (NASDAQ:AAPL) iPhones.
Fortunately, the pair only used the giant screen to play a quick game of Space Invaders before they explained to the billboard’s owner how to fix the security breach. But if a couple of kids can take over a jumbo-screen with nothing more than a smartphone, imagine what kind of damage could be done if with more time and better resources.
And that’s when the floodgates really opened. In the shadow of Michelle Obama’s hack, last week, India’s Defense Research Development Organization was hacked. BP (NYSE:BP) announced that its network is attacked up to 50,000 times per day. And we learned that Wall Street has suffered 140 cyberattacks in just the last six months
So far, all the attacks have been staved off or minimized (as far as we know), but it only takes one successful hack to do a lot of damage.
Ways to Play
The tricky part about this budding theme is determining how an investor can capitalize on it.
Most investors struggle to name one publicly traded company in the business. To that end, here’s a hint … one of these company’s antivirus products is probably on the machine you’re using right now. Norton antivirus software is developed and owned by Symantec (NASDAQ:SYMC), while McAfee antivirus software is owned by Intel (NASDAQ:INTC).
But SYMC and INTC have a wide variety of product offerings, thus are less likely to see a significant bump from increased cybersecurity attention. Cybersecurity pure plays, on the other hand, should see a significant jump. The cream of that crop is going to be names like Checkpoint Systems (NYSE:CKP) or Fortinet (NASDAQ:FTNT).
Fortinet offers FortiOS 5, which the company unbashfully calls the most powerful security operating system in the world. To give credit where it’s due, though, Fortinet does provide one of the top solutions for enterprises looking to lock down its wireless networks and cloud-based data storage centers.
As for Checkpoint, it does many of the same things Fortinet does, although it’s also integrated a compliance-monitoring regimen to its software, ensuring that its customers are meeting basic security regulations.
Choosing between those two companies in isn’t even the point, however. The point is, cybersecurity reached a “big deal” status last week, putting a major ball into motion.
Savvy traders are already looking for the best way to ride that growing trend. You might want to do the same.
As of this writing, James Brumley does not have a position in any of the aforementioned securities.