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Cyber Warfare Growing on a Global Scale - And We Have the Best Way to Profit

By , Money Morning •

In the Internet era, cyber warfare is growing on a global scale.

Corporations, governments, armies, and anonymous groups of thrill-seeking hackers are playing a perpetual game of cat and mouse.

For that reason, worldwide spending on network and data-security technology will rise to more than $10 billion by 2016 from about $6 billion last year, according to a market-outlook report by technology-forecaster ABI Research.

Another recent study, by Forrester Research Inc. (Nasdaq: FORR), found that the share of business IT budgets devoted to security nearly doubled from 7% in 2007 to an estimated 14% last year.

If you're wondering what's behind this growth, you need look no further than some recent newspaper headlines.

Earlier this year, hackers infiltrated Sony Corp.'s (NYSE ADR: SNE) PlayStation Network and accessed the personal information of 77 million accounts in what's considered the biggest such security breach in history.

That was followed this summer by phone-hacking scandal at British tabloid The Daily Mirror that wreaked havoc on News International, media mogul Rupert Murdoch's British newspaper arm.

And finally, this past weekend Sesame Street's YouTube channel was compromised, and hardcore pornography videos displaced the likes of Elmo and Cookie Monster.

Of course, all of this is harmless troublemaking in the grand scheme of cyber warfare.

Indeed, a well-coordinated cyber attack on U.S. military installations or the country's power grid poses an even greater threat to stability.

And it's clear that that threat comes primarily from China.

Chinese "Cyber Militias" Conducting Cyber Warfare

U.S. officials blame China's government, or agents acting on its behalf, for the theft of neutron bomb designs, the defense secretary's e-mails, and private sector intellectual property worth billions of dollars.

Indeed, the Financial Times recently reported that the People's Liberation Army (PLA) already has partnered with China's private sector to form "cyber militias," units of young computer programmers tasked with cyber attacks and cyber defense.

For instance, Nanhao Group, a Hengshui-based technology company that makes educational hardware and software, has been home to a PLA-sponsored cyber militia since 2005, according to The FT.

"All staff under 30 belong to the unit," Nanhao Vice President Bai Guolian told the paper.

Bai confirmed that its cyber militia unit was led by the local PLA command and has "regular exchanges" with it, training PLA officers. Asked whether the group would carry out cyber attacks, he said: "That has nothing to do with you."

The Nanhao cyber militia is one of thousands, The FT said.

Indeed, the PLA first made cyber security and espionage a priority in 1999 and has been collecting external talent for its operations since 2002. In addition to its cyber militias, the PLA sponsors information warfare research and hacking competitions at universities.

That has the United States and other Western countries playing catch-up.

Mission Critical

The Business Roundtable (BRT) - an association of leading U.S. companies with more than $6 trillion in collective annual revenue and employing more than 14 million workers - just last week put forth a plan to develop along with the government a more modern approach to cybersecurity.

The report, "Mission Critical: A Public-Private Strategy for Effective Cybersecurity," called for a collaborative effort by the departments of defense and homeland security, as well as the greater intelligence and diplomatic communities, to better protect businesses and national security.

"Protecting the United States from constant cybersecurity threats requires seamless, ongoing private-public sector coordination and planning," said Randall Stephenson, chairman and CEO of AT&T Inc. (NYSE: T). "Business Roundtable's plan calls for a flexible policy approach that establishes the government's critical role and encourages companies to continuously innovate and invest in advanced network technologies."

Businesses worldwide lose a staggering $221 billion a year due to data theft. Americans are affected to the tune of $54 billion.

Still, these random attacks by rogue hacking collectives pale in comparison to China's coordinated efforts to acquire intellectual property by any means necessary.

"I don't believe that there is precedent in history for such a massive and sustained intelligence effort by a government to blatantly steal commercial data and intellectual property," House Intelligence Committee Chairman Mike Rogers, R-MI, said earlier this month at a hearing on cybersecurity.

Google Inc. (Nasdaq: GOOG) in June said hackers in China tried to hack into the Gmail accounts of hundreds of journalists, Chinese activists, and U.S. government officials.

"That's just the tip of the iceberg," Rogers said. "There are more companies that have been hit that won't talk about it in the press, for fear of provoking further Chinese attacks."

Six Cybersecurity Investment Opportunities

The need for cybersecurity will only grow as attacks continue to increase in frequency and sophistication. Cybersecurity stocks make good investment candidates for precisely that reason.

Investors might consider the following five stocks:

  • Symantec Corp. (Nasdaq: SYMC) - Symantec is the largest remaining publicly traded computer security firm, since McAfee was absorbed by Intel Corp. (Nasdaq: INTC). Symantec provides 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, and currently carries a price/earnings (P/E) ratio of 21. Projected earnings for this year are $1.61 per share and the average analyst price target is $22.00.
  • Check Point Software Technologies Ltd. (Nasdaq: CHKP) - 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, and carries a P/E of 24.
  • Sourcefire Inc. (Nasdaq: FIRE) - 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.
  • SAIC Inc. (NYSE: SAI) - 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 8.65. Analysts expect earnings to be flat to slightly higher over the next two years.
  • ManTech International Corp. (Nasdaq: MANT) - 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. 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.

Of course, if you really want to profit from cybersecurity, Money Morning Private Briefing has the inside scoop on the best potential profit play in the sector. This company has had steadily rising revenue for the past five years, and is poised to make an even bigger splash going forward.

The stock was first recommended to Private Briefing subscribers on Sept. 26. and has already surged 13%. You can get access to this opportunity and many more by signing up for Private Briefing, which you can do by clicking here.

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