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Five Ways to Profit from Cybersecurity Stocks

By , Contributing Writer, Money Morning •

No matter which way the market's headed, companies won't skimp on protecting themselves from a growing number of dangerous communications attacks - meaning now's the time for us to profit from cybersecurity stocks.

The number of computer "hackers" who tap into networks for sensitive corporate and personal information has soared as an increasing number of new technology products hit the markets.

These cybercriminals have found ways to assault systems previously thought to be highly secure and sophisticated: The International Monetary Fund, the French Ministry of Finance, and global security company Lockheed Martin Corp. (NYSE: LMT) have all been hacked this year.

Computer industry sources estimate that more than 400 new threats to data security - targeting everything from huge government and corporate processing systems to smartphone applications - are identified every month, according to a CBS News report earlier this month.

What's worse - protection from these threats isn't cheap.

A report released by online security specialist Symantec Corp. (Nasdaq: SYMC) in early September said cybercrime "cost victims $388 billion in time and money" in 2010, "hitting 431 million people in 24 countries."

And these cyberthieves are just getting started.

Cybercrime: A Growing Epidemic

While cloud computing has been a game-changing trend for the computer industry, it has a dangerous - and pricey - side effect. It has increased the avenues hackers can take to access sensitive data.

The booming smartphone industry has also created a vulnerable consumer base. Symantec estimated that 54% of adults who access the Internet via their computers or smartphones have been victims of virus or malware attacks so far in 2011 - a percentage that's almost certain to climb much higher as smartphone users download increasing amounts of data.

And the risks aren't limited to computers and phones, as evidenced by the hacking last April of Sony Corp.'s (NYSE ADR: SNE) PlayStation Network. The attack exposed the personal information of almost 100 million users and forced Sony to shut down the network.

These growing threats have led major players like Apple Inc. (Nasdaq: AAPL) and International Business Machines Corp. (NYSE: IBM) to beef up their security divisions.

Companies without in-house cybersecurity teams have been on the hunt for a good takeover target to bring such expertise on board.

Intel Corp. (Nasdaq: INTC) about a year ago paid $7.68 billion to buy out McAfee Inc., a leading global supplier of computer security software. Digital-product supplier Imation (NYSE: IMN) last week bought the security hardware business of privately held IronKey Corp.

But a slew of companies are solely focused on computer security, and among them are these five hot profit opportunities.

Profit from Cybersecurity Stocks

There are two approaches to take when looking for profits in the computer security industry:

  • Focus on companies that specialize in specific data-protection products or online security,
  • Or get ahead of the curve by investing in companies that educate and train the aforementioned computer security "geeks," since demand for their graduates can only increase in the years ahead.

In addition to revenue and earnings growth, stocks in the first category offer shareholders higher-than-average potential takeover profits. Three companies to consider include:

  • Symantec Corp. (Nasdaq: SYMC), recent price $16.20 - With McAfee folded into Intel, Symantec is probably the largest remaining publicly traded computer security firm, providing data protection to a wide range of clients all over the world. The company offers both direct and online sales, and has combined growth with rapid expansion via acquisitions, the most recent being a June buyout of data-management specialist Clearwell Systems Inc. Symantec earned 92 cents a share in the fiscal year ended April 1, 2011, giving it a price/earnings (P/E) ratio of 18.5. Projected earnings for this year are $1.61 and the average analyst price target is $22.00. Symantec pays no dividend.
  • Check Point Software Technologies Ltd. (Nasdaq: CHKP), recent price $52.19 - Israeli-headquartered Check Point specializes in developing custom software and hardware that allows companies to provide secure online financial transactions worldwide, and offers a number of other software products and security services for the global information technology (IT) sector. The company topped off six years of earnings growth with a profit of $2.13 a share in 2010, giving it a P/E ratio of 26.4. The stock pays no dividend.
  • Sourcefire Inc. (Nasdaq: FIRE), recent price $27.26 - Sourcefire provides IT security solutions for companies in healthcare, financial services, manufacturing, energy, education, retail and communications sectors worldwide. Revenue of $130.5 million in 2010 almost tripled 2007 numbers. Earnings per share rose to 53 cents from 32 cents in 2009, and analysts estimate earnings of 68 cents a share in 2011. The average projected price target is $29.50; the stock pays no dividend.

Two leaders in the computer technology and security training sectors are:

  • SAIC Inc. (NYSE: SAI), recent price $12.01 - San Diego-based SAIC has a handle on government computer security, serving many federal government agencies and branches of the U.S. military, along with state, local and foreign governments. The company earned $1.51 a share on revenue of $11.1 billion in the fiscal year ended Jan. 31, 2011, giving it a P/E ratio of just 7.9. Analysts expect earnings to be flat to slightly higher over the next two years, with a projected price target of $18.00. The stock pays no dividend.
  • ManTech International Corp. (Nasdaq: MANT), recent price $30.23 - Far more than just a computer training operation, Virginia-based ManTech is a highly diversified provider of security technologies for government agencies, including the Central Intelligence Agency (CIA), Federal Bureau of Investigation (FBI) and Department of Homeland Security. Operating in about 40 countries worldwide, MANT had $2.6 billion in revenue in 2010, dropping earnings of $3.43 a share to the bottom line, equating to a P/E ratio of 9.0. Earnings are expected to rise to $3.91 in the coming year. The stock has an average projected price target of $47.00, and the 84-cent dividend represents a 2.7% yield.
Action to Take: These five companies are poised to profit from the explosive growth in cybersecurity spending.

But there's actually one other company - a small-cap player - that has a tremendous upside: If current projections are correct, the stock could soar by 160% or more over the next 12 months.

Unfortunately, it's too small to recommend to 600,000 readers. So we're profiling it in today's edition of Private Briefing, our newest investment-advisory service, which provides readers with the latest insights, analysis and recommendations from our group of global-investing gurus.

You can get started for only $5. To find out more, or to access today's report on the cybersecurity small-cap player, just click here.

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