There are few things that are certain in the stock market. But the risk of hacking means that cybersecurity is very much in demand, and that the best security companies will have plenty of business over the next few years no matter what happens to the broader American economy.
After all, we live in an increasingly wired world. Every company has data it needs to protect — whether it be customer info, personnel files, patent information or just the integrity of its network to ensure business operates properly. Thus, cybersecurity is a must for any legitimate business of scale. And security companies that offer the best service are sure to have clients in the years ahead.
So if you want to invest in this trend, where do you look?
Here are some of the top security companies in the world right now, spanning both cybersecurity for businesses as well as identity theft safeguards for consumers:
Back in July, tech giant Cisco (CSCO) bought cybersecurity firm Sourcefire for $2.7 billion. This acquisition adds to the long list of CSCO services and products that protect digital businesses — including threat protection from hacking, secure access to proprietary information and compliance services to meet regulatory standards such as the Health Insurance Portability and Protection Act.
According to the company, Cisco is the industry leader with more than $2 billion in enterprise security revenue each year, as well as the No. 1 market share for cloud security, secure router hardware and integrated security.
There are obvious problems with broader enterprise spending, for security and otherwise, in 2013 and that had led to significant underperformance for CSCO this year. However, the long-term cybersecurity trend seems to benefit this big player most.
While Cisco has its fingers in many pies of enterprise technology, Symantec (SYMC) is more of a pure play on cybersecurity.
SYMC focuses mainly on security, backup and accessibility solutions. Consumers would recognize it best from the Norton line of anti-virus software. It is also the most-used “certificate authority” on the web, meaning it helps identify trustworthy websites.
Symantec is a smaller company at just $15 billion in market cap, so it is established but still has a lot of room to grow. Of course, don’t think it’s likely to be an acquisition target anytime soon. Intel (INTC) may have ponied up $7.6 billion for competitor McAfee in 2010 but it’s hard to believe a deal twice that size is coming down the pike.
SYMC is up 20% in 2013 and up 45% since January 2012, slightly underperforming the market, but the company does pay a nice 2.7% dividend right now and is sitting on $3.8 billion in cash and short-term investments.
Security software company FireEye (FEYE) just went public in 2013, raising $300 million to expand the business. And while this company is indeed untested as a publicly traded stock, there is a lot of experience at the helm via its founder Ashar Aziz.
Aziz founded FireEye in 2004 after selling his previous virtualization and security business, Terraspring, to Sun Microsystems in 2002. He has a lot of experience with security companies in a digital age and is focusing on protection of newer technologies like smartphones and social networks beyond just conventional desktop anti-virus sales.
The company still doesn’t have much of a track record and has lagged the markets slightly since its September IPO. But if you want to get in on the ground floor of a cybersecurity player, FireEye stock is perhaps your best shot.
Check Point (CHKP)
When you think of the term “firewall,” one of the first security companies that should sprint to mind is Check Point Software Technologies (CHKP). It literally invented the concept with its innovative FireWall-1 software that became the gold standard for cybersecurity.
Check Point is a leader in network security, URL filtering and “secure gateways” to protect a company’s network from either irresponsible internet use or malicious software from third parties.
CHKP is definitely a behind-the-scenes company, but fills a crucial role. Any business that has a lot of employees wired to the Internet will need to filter out spam, malware and harmful websites. And while Check Point may not materially contribute to the bottom line, there’s no question that its services are an important safeguard against costly cybersecurity breaches or the lost of productivity should a network go down.
Check Point stock is up 29% year-to-date to outperform the market. It has averaged double-digit sales growth across the last five years, and is a decent opportunity for new money right now.
Guidance Software (GUID)
All of these previous plays are preventative cybersecurity companies. But what happens when something goes wrong? If you’re outsmarted by hackers, someone shares their password irresponsibly or the network just doesn’t function properly … where do you turn?
Guidance Software (GUID), that’s where.
Guidance positions its self as “the worldwide leader in digital investigations,” tracking down the culprits of hacking or identity theft and helping to repair the damage. The company positions itself much more as a detective than a security guard, with services that include “incident response” and “computer forensics” to help a business that has been hacked.
Several Fortune 100 companies use the EnCase platform, including video game giant Electronic Arts (EA), defense firm Lockheed Martin (LMT) and even tech giant Apple (AAPL). You can bet that these big firms all have cybersecurity software, too … but with so much riding on digital security, they aren’t comfortable trusting just one company to guard the door; they also want a detective waiting in the wings to track down any problems and fix them ASAP.
Guidance is a very small stock, under $300 million market cap, and has fallen over 25% year-to-date in 2013. That’s because revenue has rolled back substantially on the year — as it has for many enterprise tech firms — and because GUID is still operating in the red.
However, a turnaround in business spending and the secular growth of the cybersecurity industry could create a big tailwind for Guidance Software in 2014.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.