With the "Cyber-Hacking of America" saga, the plot continues to thicken.
On Tuesday, top U.S. intelligence officials told a Senate hearing panel that cyber-spying and cyber-attacks have replaced conventional terrorism as the top threat to this country's security.
A day later, in a closed-door session at the White House, U.S. President Barack Obama met with more than a dozen top CEOs, hoping this personal approach would win their support for a cybersecurity-legislation proposal that's gotten bogged down in Washington's political morass.
Indeed, as The Los Angeles Times reported, President Obama's timing was near perfect since "as if on cue, authorities reported numerous new cyber-attacks [that same day], and hackers believed to be operating from servers in Russia posted online what appeared to be personal financial information about former Republican presidential nominee Mitt Romney, golfer Tiger Woods, and others."
Since launching Private Briefing in the summer of 2011 we've been warning that cybersecurity, cyber-attacks and cybercrime were destined to become a major trouble point – and a huge profit opportunity for investors who understood this and were willing to act. We even said the whole "Cyber-Hacking of America" saga would become one of the top stories of 2013.
And that's just what's happened.
A Gatling-gun-like barrage of reports has turned the cybersecurity issue into front-page news – especially because of the allegations that a unit of China's military is launching attacks against U.S. corporations and government agencies.
As a result, the Pentagon announced a big expansion of its "Cyber Command" (if it can find the personnel). On Feb. 12, President Obama issued an executive order that would allow specified companies – those that own or run chemical firms, or water and electric utilities, for instance – to receive classified intelligence on cyber-threats.
Thanks to intense opposition from Corporate America, however, Congress has refused to pass the White House-backed package.
In the meantime, one revelation after another has alleged that China has been orchestrating a greater and greater number of the cyber-incursions.
In mid-February, The Washington Post reported that a brand new National Intelligence Estimate (NIE) concluded that the United States "is the target of a massive, sustained cyber-espionage campaign that is threatening the country's economic competitiveness."
The chief culprit was identified as China. Iran and Russia have also been identified as "bad actors."
Just days later, Mandiant Corp., a U.S.-based cyber-research firm, released a report that alleged that a surging number of cyber-attacks against the United States were launched by the China's People's Liberation Army. According to the study, 141 U.S. companies have had their data breached or stolen since 2006.
China, for its part, has repeatedly denied the allegations. But President Obama has been increasingly blunt in the comments that he's directed at the Asian giant, as he and his aides have publicly rebuked Beijing for its alleged involvement in the cyber-hacking of companies and government agencies.
"We've made it very clear to China and some other state actors that, you know, we expect them to follow international norms and abide by international rules," Obama told ABC News. "And we'll have some pretty tough talk with them. We already have."
Here's another: AVG Technologies NV (NYSE: AVG), an Amsterdam-based security player that's been growing organically and via acquisitions … and whose earnings are forecasted to advance by more than 40% this year, nearly 17% in 2014, and nearly 19% in 2015.
Shares of the $715 million company were trading at less than 16 times earnings yesterday.
AVG provides branded security software and related online and secure-search services. Products include Internet-security and antivirus-software suites, and it also generates revenue via subscription-based services. It caters to both desktop and mobile users.
As of Dec. 31, the company said it had 146 million users, an increase of 38 million (35%) from 2011.
The stock plunged more than 9% on Tuesday after the company announced that CEO J.R. Smith was resigning after six years at the helm – which caused Morgan Stanley (NYSE:MS) to downgrade the shares from "Overweight" to "Equal-Weight." He'll stay on until a successor is named (AVG has hired an executive-recruiting firm to find a replacement), but even then won't leave the firm completely: He will join the company's supervisory board.
Then yesterday, BWS Financial initiated coverage with a "Buy" rating and established a target price of $30. The stock jumped 7.79% to close at $13.14.
AVG was founded in the Czech Republic in 1991 and went public in February 2012 at $16 a share.
For the fourth quarter, AVG posted revenue of $95.2 million, an increase of 28% from the comparable quarter the year before. For the entire year, revenue was $356 million, an increase of 31%. Full-year profits, excluding extraordinary items, came in at $45.1 million for 2012, a 30% drop from the $65.7 million reported for all of 2011.
But the company has experienced five straight quarters of growth since going public – so it's really a question of continuing to grow the top line while taking steps to boost the bottom line. Part of its strategy is to diversify away from antivirus software by increasing its focus on "secure search."
Analysts have a consensus target price of $22 on the stock. That's 67% above where the stock closed yesterday. And the BWS Financial target of $30 – which is the "outlier" among projected target prices – is 128% above where AVG shares closed.
Needless to say, a stock with that kind of potential upside is a high-risk/high-return profit play. AVG is trying to convert is antivirus users into secure-search customers. That transition hit a rough patch late in the year as AVG eliminated unprofitable distribution partners. A key to this year will be the company's push to add new partners and search providers.
The management changeover will also create uncertainty – although the hiring of a solid, or even a well-known, successor could serve as a share-price catalyst.
Use a 35% "trailing stop," but be sure to observe position-sizing limits of 1.5% of your holdings or less.
Delcath Update: When Delcath Systems Inc. (Nasdaq: DCTH) reported its fourth-quarter results late Wednesday, the liver-cancer specialist beat estimates on a per-share basis but came up light on a revenue basis.
The New York-based Delcath also announced plans to raise $50 in new funding – after having raised $21 million from investors during the first two months of this year.
Delcath raised the $21 million through an "at-the-market" (ATM) offering. That allowed the firm to sell shares on the secondary market over a period of time – instead of all at once. On Wednesday, Delcath filed a shelf-registration statement with the U.S. Securities and Exchange Commission (SEC), registering the additional $50 million in shares to be sold through an ATM agreement with Cowen & Co. Once the arrangement is blessed by the SEC, Delcath has three years in which to sell the shares.
The company said it will use any net proceeds for "general corporate purposes" – including such typical definitions as capital expenditures, product commercialization, regulatory approval efforts, additional research, and clinical-trials costs.
The Best Hedge You'll Find: The Dow Jones Industrial Average posted its 10th-straight winning session, its longest winning streak since late 1996. If you're one of those folks who likes to protect your flank, our special report "The Seven Investments You Have to Make in 2013" includes one of the shrewdest hedging plays that I've seen in years – courtesy of Capital Wave Forecast Editor Shah Gilani, a retired hedge-fund manager who knows all of Wall Street's tricks. We've already seen that hedge pay off in a big way during a temporary reversal last month. So I'm completely confident that the next market reversal will provide you with the same result (and, in the meantime, some nice peace of mind).
[Editor's Note: Unless otherwise specified, we recommend investors employ a 25% "trailing stop" on all holdings.]