3 Cybersecurity Stocks That Should Help Investors Lock Up Gains

The growing security needs within the cloud should push these stocks higher

By Will Healy, InvestorPlace Contributor

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Cybersecurity plays a critical role in IT infrastructure. We receive a reminder of this whenever we read about a highly publicized security breach. During the PC era, cybersecurity stocks such as Symantec (NASDAQ:SYMC) would often rise soon after such breaches, as firms of all types tend to spend on these occasions to give themselves as much protection as possible.

Today, with the wide range of networks and devices in need of protection, such breaches may not necessarily lift all cybersecurity stocks. As this industry expanded, new companies emerged to deal with specific areas of cybersecurity. Companies such as AT&T (NYSE:T) and Cisco (NASDAQ:CSCO), which did begin with a security focus, also entered the business. Additionally, most expect 5G wireless to increase the use of IT, and hence, further increase the need for and further diversify offerings in online security.

This will likely bring growth to many cybersecurity stocks. Many will choose to buy the Prime Cybersecurity ETF (NYSEARCA:HACK). However, as is the case with most ETFs, some holdings hold more potential than others. Investors who want to lock onto these better holdings should research the following cybersecurity stocks:

Carbonite (CARB)

Investors should think of Carbonite (NASDAQ:CARB), not as the substance used to entomb Han Solo in The Empire Strikes Back, but as a cloud-based security solution. Carbonite designs software to bring affordable, reliable cloud security to both homes and small businesses. Analysts expect cloud revenue to reach $186 billion this year and rise to $302.5 billion by 2021. This growth places CARB stock in an ideal position, as cloud-based security will only increase in importance with this growth.

As one of the small-cap cybersecurity stocks, many might overlook this firm. However, despite its size of about $1.1 billion, it has won awards such as the “best Windows backup tool” according to Lifehacker. PC Pro and NextAdvisor have also given this software glowing reviews.

CARB stock launched its IPO in 2011. For years, it struggled to move far above its original $10 IPO price. However, in 2016 it finally began a move higher. Today, it trades at more than quadruple its 2016 lows.

Despite the massive growth, the stock continues to trade at a low valuation. Wall Street forecasts earnings of $1.56 per share for this fiscal year. That takes the company’s forward price-to-earnings (P/E) ratio to around 21.8. Even compared with the lower growth rate for next year, CARB stock looks cheap.

It has become especially cheap given its growth rate. Analysts believe the company will increase its net income by 97.5% this year. They expect its growth to slow to 17.3% next year. Still, they expect the growth rate to remain in the double-digits on average for at least the next five years. Given the large growth potential from this small company, CARB will likely stand out among cybersecurity stocks in the coming years.

Palo Alto Networks (PANW)

Palo Alto Networks (PANW)
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Palo Alto Networks (NYSE:PANW) provides firewalls and cloud-based security solutions. Unlike Carbonite, Palo Alto targets larger businesses. They place a special emphasis on preventing cyber breaches. This approach has attracted business from over 54,000 organizations throughout the world. Palo Alto serves over 85 of the Fortune 100 companies and over 63% of the Global 2000. Fortune also named Palo Alto one of the “50 companies changing the world” in 2017.

As one might expect, the growth of PANW stock has mirrored that of the cloud in general. The stock stagnated for more than a year after its 2012 IPO. It began a breakout in late 2013. At this time, Amazon (NASDAQ:AMZN) had started to report numbers for Amazon Web Services separately. Microsoft (NASDAQ:MSFT) began to pivot toward a cloud focus. This focus also boosted PANW stock. It would more than quadruple in value by mid-2015. PANW did not return to the 2015 highs until earlier this year. Now, it resumes a march higher that I believe will continue in the months to come.

PANW stands as one of the cybersecurity stocks that holds a high potential to similarly reward investors. Analysts predict profits will grow by 26.1% this year. Over the next five years, they also expect this growth to average about 30.6% per year.

This takes the forward PE to 43.6. Although many will regard that multiple as high, a growth rate of over 30% might justify such a valuation. Also, the market cap stands at just over $20.5 billion. I believe this market cap will grow much larger over time as cloud use continues to grow. Given its market, PANW should become not only one of the more essential cybersecurity stocks but also a lucrative cloud stock as well.

Science Applications International (SAIC)

Science Applications International (SAIC)
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Science Applications (NYSE:SAIC) specializes in IT for the government services market. While not purely an IT security company, online protection has become one of the firm’s more critical offerings. Due to the country’s defense needs and the sensitivity of their data, security has become an essential function of SAIC. As such, it has become regarded as one of the more significant cybersecurity stocks.

Also, the current Republican administration has made increased defense spending a priority. No matter how one might feel about the higher spending, it increases the need for services provided by SAIC. Moreover, the U.S.-China trade war, issues with Russia, and continued turmoil in the Middle East will emphasize this need.

Due to this growth, Wall Street believes SAIC’s profits will increase by 13.2% this year. The same analysts predict a slow-down to 6.8% net income growth next year. Despite this growth, SAIC stock also trades at a reasonable valuation. If current earnings estimates of $4.55 per share hold for this fiscal year, the stock will trade at a forward PE of under 17.

SAIC also pays an annual dividend of $1.24 per share. While a dividend yield of 1.6% may not drive investment by itself, it adds to the benefit. To be sure, some cybersecurity stocks will show faster growth than SAIC. However, with the growth rate, the low PE, and the inherent stability of defense spending, SAIC stands as one of the safer stocks in this industry.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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