Earlier this month, the U.S. government revealed that its personnel database was hacked, potentially compromising the data of four million federal workers.
Given the magnitude of the breach, the government looks poised to increase its cybersecurity spending by leaps and bounds.
However, the biggest winners from this trend might not come from the ranks of the best-known cybersecurity stocks — names like Palo Alto Networks (PANW), Check Point Software (CHKP) and FireEye (FEYE), which specialize in providing IT security for the private sector.
Instead, you might want to focus on some lesser-ballyhooed names.
Bring on the Contracts!
When it comes to government IT spending, inertia is on the side of these three defense and cybersecurity stocks. SAIC, MANT and BAH have already received lucrative IT security deals from the federal government. And since the government is not known for making radical changes at the drop of a hat, federal money should continue to flow their way.
There seems to be a consensus that the government will have to undertake a radical restructuring of its IT security system going forward in the wake of the recent massive security reach. The government’s main IT intrusion detection system, known as Einstein, failed to detect the hack until well after it had begun. Cybersecurity expert Morgan Wright, who works for a consulting firm called the Center for Digital Government, said that Einstein “certainly appears to be a failure at this point,” according to The Associated Press.
Wright called for the government to completely outsource its IT security to the private sector, but given the government’s aversion to radical change, that isn’t likely to happen anytime soon.
A much more likely scenario is that the Obama administration will follow the advice of Republican senator Richard Burr, who called on the government to overhaul its IT security. Indicating that that both parties believe that the government must significantly improve its cybersecurity, Democrat Adam Schiff, the co-chair of the House’s cybersecurity committee,, said that “a substantial improvement in our cyber databases and defenses is perilously overdue.”
Of course, major upgrades in the federal government’s cybersecurity system will probably be expensive — good news for the contractors that spearhead the upgrades. (Of course, government IT contractors were looking good anyway, as President Obama in February proposed increasing federal cybersecurity spending to $14 billion from $13 billion).
SAIC, MANT and BAH were among the 17 companies that were awarded a total of $6 billion of cybersecurity contracts by the Department of Homeland Security in 2013. It’s a good bet that these defense and cybersecurity stocks will be among those to benefit from new upgrades that the government will have to make to its systems.
As a result, SAIC, MANT and BAH stock all look like good investments at current levels. A quick look at each:
- Science Applications International Corp (SAIC): SAIC is a technology integrator that specializes in providing engineering services to the U.S. federal government, as well as state and local governments and businesses around the world. SAIC’s cybersecurity clients have included the Naval Sea Systems Command and the Space and Naval Warfare Systems Command.
- ManTech (MANT): ManTech provides systems used in national security programs, primarily for the federal government, with customers including the FBI, Department of State, Department of Homeland Security and all branches of the Armed Forces. Just this week, ManTech closed on a deal to acquire Knowledge Consulting Group — a move aimed at bolstering MANT’s cybersecurity advisory services.
- Booz Allen Hamilton (BAH): Booz Allen Hamilton sells management and technology consulting, along with engineering services, to governments, multinational corporations and nonprofit organizations. Just last month, BAH earned a $39 million cybersecurity contract with the DHS’s Continuous Diagnostics and mitigation program.
Bottom Line
While cybersecurity stocks like FEYE certainly are poised to benefit from the overall increasing necessity for security solutions, the coming boom in government security spending should bode well for these lesser-touted companies.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
