Investing in cybersecurity stocks seems like a no-brainer for traders.
In the last year or so, we’ve seen massive data breaches, including health benefits provider Anthem (ANTM), which saw some 80 million accounts compromised, and more than 20 million government employee accounts hacked in a separate event this summer.
With hackers on the rise, it’s no wonder that investments like PureFunds ISE Cyber Security ETF (HACK) have outperformed in the last year or two, led by top cybersecurity stocks including Palo Alto Networks (PANW) and Fortinet Inc. (FTNT) to name a few; PANW stock is up almost 80% in the last 12 months, while FTNT stock is up about the same.
What Is the Future for Cybersecurity Stocks?
But lately, things have been getting more troublesome for cybersecurity stocks. The First Trust NASDAQ CEA Cybersecurity ETF (CIBR) launched in July but is down by double-digits since then, and many of the top picks in the space have softened up, too.
So are cybersecurity stocks a buy here on a brief pullback, or are they overbought?
Well, in the short term, there may still be plenty of volatility for these stocks and perhaps a bit more pain. Some smaller names like FireEye (FEYE) are still not profitable, and players like Palo Alto Networks and Fortinet are trading for tremendous premiums over forward earnings. PANW stock and FTNT stock, for instance, both trade for a forward price-to-earnings ratio of over 60 as of this writing.
However, the long-term picture is still very bullish — if you can call it that — for hacking and cybersecurity stocks.
Cybersecurity More Important than Ever
It’s not just businesses that need to protect their customers. Consider that the Department of Defense budget for cybersecurity soared in 2014 to $447 million (the latest numbers), up almost 135% from $191 million in 2013.
Furthermore, a recent Wall Street Journal article just screamed that the “Cyberwar Ignites a New Arms Race” around the world with this ominous introduction:
“Countries toiled for years and spent billions of dollars to build elaborate facilities that would allow them to join the exclusive club of nations that possessed nuclear weapons.
Getting into the cyberweapon club is easier, cheaper and available to almost anyone with cash and a computer.”
In other words, one of the few durable trends that investors can profit from in the next few decades is the rise of hackers and the necessity of strong cybersecurity stocks to defend the U.S. and its businesses against digital mayhem.
Say what you want about the short-term valuations, but this long-term threat is real … and taking a position in cybersecurity stocks may be a decent way to protect your money, in more ways than one.
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 hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.