This Critical Trend Is Both a Danger and an Opportunity

This Critical Trend Is Both a Danger and an Opportunity

Dave Gilbert here, Editor of Smart Money.

There seems to be month or a day for everything. (Today, for example, is National Beer Day. Cheers!)

These commemorative days and months are often about something fun and even humorous – be sure to enjoy National Chocolate Day tomorrow – but they can also be about something quite serious.

October, for example, is National Cybersecurity Awareness Month, and cyberattacks are no joke. They are a big challenge facing governments, corporations, and individuals all around the world.

Unfortunately, threats are increasing everywhere, and that isn’t going to change anytime soon.

That’s why billions of dollars are spent every year preventing cyberattacks and recovering from them, making this unfortunate trend something we as individuals and investors need to be more aware of.

Let’s look at the situation and some ideas for how investors can play it…


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Hack Attacks Are on the Rise

Cyberattacks have become so frequent that they now average 2,200 per day – one every 39 seconds. That means there’s probably been another cyberattack just since you started reading this.

The surge in people who work remotely since the pandemic opened up more opportunities for hackers, especially if folks don’t take recommended safety measures like using strong passwords, multi-factor authentication, updated software, virtual private networks, and being aware of attempts to obtain personal information – aka “phishing.”

In addition, the number of wirelessly connected devices has gone through the roof – from our smartphones to kids’ toys to surgical robots. More targets to attack. Cisco Systems Inc. (CSCO) has estimated there will be three times as many connected devices as there are people in the world next year – or 29.3 billion devices.

Unfortunately, cyberattacks are also an instrument of war in this digital age. Shortly after invading Ukraine, Russia disabled Ukraine’s satellite communications, though Ukraine managed to get them back online quickly.

Microsoft Corp. (MSFT) said earlier this year that the company noticed 15 Russian cyberattacks against Ukraine last December before the war started. Russia invaded on Feb. 24, and Microsoft noticed a jump to 125 cyberattacks in March.

The global cybersecurity market was valued at $139.77 billion last year, according to Fortune Business Insights. Fortune projects 13.4% annual growth through 2029, which would almost triple the market to $376.32 billion.

Another report from market research firm Gartner says organizations will spend more than $188 billion on cybersecurity next year, with that number increasing to $262 billion in 2026.

This is consistent with Eric Fry’s analysis when he started recommending cybersecurity-related investments to his Investment Report readers two years ago. In one of his special research reports for his subscribers, he wrote about the impact of cloud computing specifically…

And the more that businesses and individuals migrate their technological lives to the cloud, the greater the imperative to secure the data and apps that reside there.

For example, as the global workforce becomes more distributed and more employees work from home, demand for cloud-based security systems grows.

According to Research And Markets, the global cloud security market is projected to grow from $34.5 billion in 2020 to $68.5 billion in 2025, at a compound annual growth rate (CAGR) of 14.7%.

Attractive Entry Points

As with every other industry – except energy – the market has not been kind to cybersecurity stocks here in 2022. Tech stocks especially have taken a beating.

The ETFMG Prime Cyber Security ETF (HACK) has slumped 25% this year, though it has shown life the last two weeks. After hitting a new low for the year on Oct. 13, HACK has bounced 14% (which outpaces NASDAQ’s 9% bounce in that same time).

A chart showing HACK’s total return from Jan. 2022 to Oct. 2022

That 2022 chart doesn’t look so hot. Now check out the past three years…

A chart showing HACK’s total return from Jan. 2020 to Oct. 2022

That tells a somewhat different story. You can see where cybersecurity stocks were headed before inflation, bond yields, and interest rates dragged on the market this year.

But the underlying trend hasn’t changed. The odds that cyber threats will decrease in the coming years are, to quote Muhammed Ali, “Slim, and none. And Slim just left town.” HACK and cybersecurity stocks are likely to return to previous highs and then some.

In that light, current prices look pretty attractive, which brings us to a cool scenario that just played out in Fry’s Investment Report. Eric actually recommended HACK to his readers nearly two years ago.

At that time, he highlighted its and the industry’s superior growth potential. But he did caution about what he thought were lofty valuations at the time…

Despite my bullish expectations for the sector, let’s exercise a bit of patience with this recommendation to see if we can pick it up cheaper than it is today. For now, I’m recommending that you pay no more than $41.25 to establish a new position in this ETF.

He was right. HACK did fall to $41.25 price… two weeks ago today. It took two years and one month, but he and his readers got the price Eric wanted to pay. It’s a good reminder of the importance of not chasing an investment that may be overvalued and of waiting patiently for the right price.

As he told his readers in the current Investment Report issue

In other words, the stock is now about 15% cheaper than it was when I first profiled it, even though the companies inside HACK have boosted their revenues by about 15% since then.

That growth trajectory will likely accelerate over the next few years, as cybersecurity becomes an increasingly essential priority for both enterprises and governments.

As the chart below shows, global cybersecurity spending is on track to grow more than 8% per year over the next few years, which would be at least double the rate of global GDB growth.

A chart showing how global cybersecurity spending is growing 2-3X faster than world GDP; the dates range from 2012 (less than $100 billion) to projections in 2026, which predict spending to be between $250-$300 billionThat rate of growth should boost both sales volumes and margins throughout the cybersecurity industry. At the stock level, therefore, the companies comprising the HACK portfolio could produce annual earnings growth above 20% per year for several years running.

HACK is one way to invest in multiple cybersecurity stocks at the same time. There are nearly 60 stocks in the ETF, including the industry’s biggest players: Palo Alto Networks Inc. (PANW), with a $50 billion market cap; Fortinet Inc. (FTNT), with $44 billion; and CrowdStrike Holdings Inc. (CRWD), with $38 billion.

Eric also recommends lesser-known companies – or companies known for other things – that are growing with the cybersecurity sector and have strong upside potential. (Learn how to access all of Eric’s Investment Report recommendations here.)

Cyberattacks are an unfortunate danger in modern life. We’ve kind of gotten used to that and are not as fazed by them as we used to be; at the same time, the problem is likely to get worse. Growth seems all but certain, making this another important long-term trend.

However you decide to invest, just be sure you have a strong password for your brokerage account.

Regards,

Dave

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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