In fiscal year 2015, the federal budget is $3.8 trillion.
When you look at a number like that, a $133 million award sounds insignificant.
But the focus of that spending is going to be life-changing for tech investors...
On Sept. 1, Uncle Sam issued this "identity theft insurance" contract to the privately held company ID Experts. It did so to protect the 21.5 million Americans whose personal information was stolen as part of a 2014-2015 cybertheft at the U.S. Office of Personnel Management.
It's all part of a massive cybersecurity push - $14 billion in fiscal 2016 alone - by the nation's leaders to thwart online intrusions at federal agencies and other critical places like banks and brokerages.
Of course, not all of these contracts are going to privately held firms or small, risky cybersecurity specialists.
Today I want to show you how to profit from a defense tech leader that recently opened up a new line in federal cybersecurity - a business that'll be growing at a hefty, steady pace between now and at least 2020.
Most investors don't even realize it's a huge player here...
Billions of Dollars Are On the Table
Cybersecurity will remain a growth field for years to come.
According to a report from Market Research Media, the federal government will spend $65.5 billion on cybersecurity between 2015 and 2020. And the pace of that spending will grow steadily at about a 6.2% compound annual growth rate (CAGR).
And that spending is borne out by the headlines - hardly a day goes by without a cyberattack on a government agency, corporation, bank, retailer, or university...
Take the hack of the UCLA Health System. In mid-July, hackers exposed the healthcare data of roughly 4.5 million patients.
On March 14, the U.S. State Department said Russian hackers breached its computer network and the agency had to shut it down to remove malicious software. Two weeks later, the state of Indiana had its website hacked and taken down.
That's minor compared with the Feb. 5 news that as many as 80 million customers of Anthem Inc. (NYSE: ANTM), the nation's second-largest health insurance company, may have had their account information stolen. That Anthem data includes employment and income histories, addresses, and Social Security numbers.
A 2014 survey by the Ponemon Institute showed that the average cost of cybercrime for U.S. retailers more than doubled from the year before to an annual average of $8.6 million per company.
Hacks on other sectors proved even more expensive, the Ponemon survey showed. The annual average cost per cyberattack came in at $20.8 million in financial services, $14.5 million in the technology sector, and $12.7 million in communications industry.
No wonder the researchers at MarketsandMarkets say cybersecurity is a global $60 billion industry. The forecasters there expect that number to double just in the next four years alone.
Given the sensitive nature of the data it holds on its computers, the U.S. government spends heavily on cybersecurity. The fiscal 2016 budget that begins Oct. 1 includes $14 billion in spending.
Roughly $5.5 billion of that will protect the Pentagon's computers alone.
This Is a Truly Unstoppable Trend
In the words, cybersecurity clearly meets the mandates of Rule No. 3 of my five-part system for building wealth with tech - "ride the unstoppable trends."
That's why I think tech investors should look at this stock now...
Waltham, Mass.-based Raytheon Co. (NYSE: RTN) is well known as one of the nation's top defense contractors. But over the last few years, Raytheon has quietly beefed up its cyber division to protect government agencies and other large organizations.
In that regard, Raytheon ranks as a "stealth" cyber play.
This is a natural business line for the nation's fourth-largest defense contractor. Every agency within the Pentagon needs cyber safeguards, and the equipment Raytheon sells, such as radar and missile-control systems, must have such cyber defenses built in.
Raytheon made a huge leap forward in April when it bought control of Websense Inc. for $1.7 billion, creating Raytheon/Websense, a new cybersecurity unit focused on commercial clients such as banks and retailers.
The move instantly diversified the company's cyber operations beyond the federal realm. Websense counts some 21,000 commercial clients, about half of whom are overseas, and it consistently ranks in the top 10 firms providing "gateways" to protect against web intrusions and data loss protection.
Plus, Raytheon isn't going it alone. Vista Partners LLC, the company that owned Websense, retains a 20% interest in the new unit.
Under the deal, Raytheon is investing $965 million in cash, providing a $600 million loan, and contributing $400 million of existing cyber assets. In turn, it expects the cyber business to bring in $500 million in sales in its first year of operations, with 20% profit margins.
When Going Private Makes Sense
Industry analysts say other large defense firms have struggled to sell their cybersecurity wares outside normal Pentagon channels. So, Raytheon forming a unit focused solely on business clients strikes me as a savvy move.
More to the point, it's part of Raytheon's long-term strategic plan. Company leaders decided back in 2007 to invest in cybersecurity as a growth business and have made some 14 acquisitions in this area since then.
For instance, Raytheon acquired surveillance and cybersecurity company Blackbird Technologies for $420 million in November 2014. Blackbird counts customers at the U.S. Department of Defense and in the intelligence community.
Much of Raytheon's civilian cybersecurity operations will be housed in the company's Intelligence, Information, and Services division. In this year's second quarter, the unit accounted for roughly 25% of Raytheon's $5.8 billion in sales, up 3% from the year-ago period.
And, even better, Raytheon is a "twofer" investment. We get both its new cybersecurity business and the company's full defense capabilities.
And those are wide-ranging. Raytheon ranks as a leader in missile defense, radar, surveillance, electronic warfare, and precision weapons. It also provides advanced sensors, avionics, data analytics, and drones.
The stock trades at $107.48, giving it a nearly $32.49 billion market cap. It has 13% operating margins and a 19% return on equity.
And the stock has built-in upside. It trades at less than 15 times forward earnings, a roughly 15% discount from the S&P 500 Index.
Over the past three months, the stock is up nearly 7.1%, compared with the S&P's 5.1% decline. Not counting Raytheon's 2.8% dividend, the stock has a two-year return of roughly 38%, more than double the broader market's 18% return.
In other words, Raytheon joins Ultimate Software Group Inc. (Nasdaq: ULTI) and the three companies I shared with you on Friday as "comeback" plays - the investments we'll use to "whipsaw" this correction right back in your favor.
Raytheon will help protect the value of your portfolio at the same time it's protecting our nation's cybersecurity - and, increasingly, our banks and retailers as well.
Michael is tracking a "video everywhere" play that's seen gains as high as 99.4% in less than four months. But it's not too late to get your "Buy" orders ready. There's plenty of upside ahead as this company moves into unmanned aerial vehicles. Click here to get the report, and you'll get Michael's Strategic Tech Investor research twice each week.
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About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.