How to Invest in Cybersecurity

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More and more companies are asking how to invest in cybersecurity, as the industry looks to be the only area of U.S. defense spending that will escape the looming budget cuts slated for March 1.

As Money Morning Executive Editor William Patalon III explained in his recent report, "The Cyber-Hacking of America," the booming interest in cyber-defense stems from the increasing number of threats targeting the United States.

Patalon said the intelligence community's National Intelligence Estimate, used to brief lawmakers, found "the U.S. is the target of a massive, sustained, cyber-espionage campaign."

A separate report released last week by Virginia-based cybersecurity firm Mandiant Corp. found a Chinese military unit was behind cyberattacks on at least 141 organizations since 2006.

"We know that the U.S. Federal Reserve has been hacked, we know that The New York Times has been hacked, and that's just the beginning," said Patalon. "This is going to be a major, major story and something that investors need to watch."

Why Cybersecurity is a U.S. Priority

The growth in spending for cybersecurity comes at a time when the Department of Defense could face $46 billion in cuts this year and $500 billion over the next 10 years as a result of sequestration.

But with increasing threats to U.S. security in the cyberworld, the country can't afford to slash its cybersecurity budget.


Indeed, the department recently announced a plan that calls for boosting its cybersecurity command by 444%, according to Patalon, increasing staff from 900 to nearly 5,000.

The expanded command would work to safeguard the U.S. power grid and other key infrastructure, protect the Pentagon and its computer systems and target "aggressor nations," said Patalon.

Other industry experts agree; cybersecurity will be a major U.S. priority this year.

Douglas Baker of the private equity firm Monument Capital told CNN, "Governments globally will increase spending on maritime and border security andprotecting critical infrastructure."

How to Invest in Cybersecurity

Governments won't be the only ones spending in this area; there are other opportunities in high-tech defense.

Private equity firms have already been active in investing in cybersecurity.

Madison Dearborn Partners partnered with CoVant Management in 2012 to create CoVant Technologies for investing in cybersecurity, IT and systems engineering companies that do work with the government.

There have also been more investment partnerships between private equity firms and midsize defense companies taking advantage of cybersecurity opportunities. National security IT firm Vistronix joined Enlightenment Capital to buy software developer Technology Associates.

Now valuations of cybersecurity companies are getting so high that even the smallest players with only $10 million in revenue are being eyed as targets.

That's why Patalon, in the accompanying video, outlined one of his favorite cybersecurity stocks to buy now, so you can get in before missing any price gains.

He said it's a pick-and-shovel approach to the industry.

"It's a big seller to government and the private sector, and it's a company we like a lot," Patalon said. "It's undervalued. We think it's a good long-term play."

If you haven't already watched the video to get this pick, check it out above.

Bill Patalon first told investors about this looming U.S. defense trend in 2011 with his Private Briefing investment service. To find out how you can get all his latest stock picks - along with daily investment analysis - check out Private Briefing.

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