Cyber-security stocks like Fire-Eye, Juniper Networks and Splunk are enjoying a boost in performance thanks to a spate of cyber-security breaches over the last couple of years. Major enterprises and global governments are increasing their spending on cyber-security as it has become apparent that no organization is safe from data breaches.
So where should investors turn to benefit from the rapidly growing tech subsector of cyber-security? Goldman Sachs analysts have some ideas.
Cyber-security incidents skyrocket
In a report dated June 12, analyst David Kostin and his team call cyber-war and cyber-crime “two of the defining geopolitical and business challenges of our time.” Nearly every day we’re hearing about more data breaches and hacks in which vital personal information is being compromised. Even government agencies aren’t immune to such attacks.
Here are just some of the most high-profile data breaches that have happened since July of last year and the types of information that were exposed (All charts/ graphs are courtesy Goldman Sachs.):
Cyber-security stocks to benefit from higher spending
Last year alone, more than 1.1 billion records were exposed in the more than 3,000 cyber-security incidents which happened around the globe. The Goldman Sachs team reports that 83% of the incidents were the result of hacks, while 14% were the result of fraud.
Also last year, the number of incidents and recorded that were exposed leaked by 25%, with the U.S. accounting for about half the incidents and exposed records. Businesses made up 53% of the incidents, while government entities made up 16%.
Goldman Sachs recently surveyed the chief information security officers of major companies and found that nearly 60% of them are planning to increase their spending on cyber-security by at least 5%. The firm reports that 20% of them are spending to increase their budgets in this area by more than 15%.
Where to invest in cyber-security stocks
The Goldman Sachs team suggests that investors who want to benefit from the increase in cyber-security spending should focus on the ISE Cyber-Security Index (HXR). They say the components of the index encompass both infrastructure providers and cyber-security service providers. Currently there are 30 stocks, with 24 of them being companies based in the U.S
There’s also a Cyber-Security Exchange-Traded Fund (ticker: HACK) that tracks the index.
Cyber-security index is smashing the S&P 500
According to the Goldman Sachs team, the ISE Cyber-Security Index has significantly outperformed the S&P 500 year to date, climbing 19% compared to the S&P’s 3% increase. In fact, the index has outperformed the S&P since 2011, beating the S&P by 123 basis points. The ISE has grown 207%, compared to the S&P 500’s 84% growth over the same time period.
The analysts further note that the median constituent in the cyber-security index has projected growth that’s greater than the median information tech and S&P 500 companies, although its valuation is just slightly greater than the two segments.
Consensus estimates for the median cyber-security company in the HXR suggest a 14% growth rate this year and 11% next year. The median info tech sector company is projected to grow 4% this year and 6% this year, while the median S&P 500 company is expected to post 2% growth this year and 5% growth next year.
Cyber-security stocks may buck a broader trend
The Goldman Sachs team expects growth stocks to fall behind the broader market due to improvement in the GDP. However, they think cyber-security stocks will be an exception. They noted that biotechnology stocks have also brought extensive growth in sales and returns.
The top ten stocks in the ISE cyber-security index make up 48% of the index, and their median return is 34% so far this year, compared to 16% for the full index and the S&P 500’s 3%.
Hedge funds seem to agree with Goldman Sachs in expecting cyber-security stocks to outperform this year. The analysts report that hedge funds hold 3% of the “typical” stock in the S&P 500 and 4% of the median tech company. However, they own 7% of the median cyber-security company.