How to Spot the Best Stocks to Buy in Tech's Fastest-Growing Sector

This week saw San Jose, California networking giant Cisco Systems Inc. (Nasdaq:CSCO) purchase Columbia, Maryland-based cybersecurity company Sourcefire, Inc. (Nasdaq:FIRE).

The purchase price was a rather steep $2.7 billion. That's $76 per share - a handsome 29% premium to the around $49 share price early Monday, before the deal was announced. Shares of FIRE are now trading at just under $76 a share.

If you're looking for stocks to buy, these shares have probably had enough fun for one night, but they may have found a decent support level.

Sourcefire has spurned suitors before, and dallied with its fair share of M&A activity - turning down a buy offer from Barracuda Networks, while acquiring antivirus companies Immunet and Clam AntiVirus in the last decade

An Ever More Urgent Need

Attacks on computer networks are, without exaggeration, ceaseless. There is at least one ongoing attack somewhere in the world at any given time. Sourcefire is one of many network security firms filling an increasingly vital niche.

Sourcefire's flagship product, FirePOWER, which is based on the open-source Snort intrusion detection system, is acknowledged to be among the best in the industry.

Snort itself is said to be the most widely deployed IDP technology on earth. One of the more interesting products is their Advanced Malware Protection, which analyzes malware attacks and works to predict and prevent even the very worst attacks.

It's this kind of killer, boutique technology that makes companies like Sourcefire so attractive to the big boys.

Why Make It When You Can Buy It?

The truth is that Cisco, and companies of similar size, are losing market share to smaller, nimble and more agile firms like Sourcefire. That Cisco would buy Sourcefire outright, rather than spend time and dollars on R&D to develop such a system on its own, fits the current "buy growth and R&D" atmosphere. We've seen this many times before, and it's only accelerating.

This heralds a blizzard of M&A activity, where larger companies will buy smaller ones who have one or two novel products or services to offer. The companies with the best products will make the sweetest targets for M&A.

In short, the best stocks to buy will be companies that place particular emphasis on the networking aspects of cybersecurity.

Sourcefire is already spoken for, but there are a few more companies out there that make attractive targets.

The Stocks to Buy In Cybersecurity

Palo Alto Networks (NYSE:PANW) offers dynamite firewall applications. These are "smart" firewalls that allow administrators to custom tailor the level of protection for the particular application, user, or content in question.

If a company has a worker out in the field or on assignment, that worker's computer will automatically have the same level of network security as he would back at headquarters, using Palo Alto's GlobalProtect firewall. Palo Alto has spent years developing this, and it's likely that someone on the next biggest tier is watching.

Fortinet Inc. (Nasdaq:FTNT) makes for another tantalizing target. Its flagship service, FortiGate, provides an absolutely comprehensive, "unified threat management" network security solution.

This means FortiGate is something of a one-size-fits-all solution. Instead of going à la carte with firewall, IDP, and so on, a company can deploy FortiGate and let it handle antivirus, content filtering, spam filtering, and intrusion prevention functions. Universal threat management is also important in that it can adapt to the ever-changing, ever more stringent regulatory environment, as governments crack down on lax security.

Sourcefire was far from the only girl at the dance, and may not have even been the prettiest. But the common factor among these smaller network security companies is innovative, must-have products and services.

When the big fish can't or won't spend the time and money to do it themselves, they'll pull out their checkbooks and buy innovation for deployment on ever larger scales. As security becomes ever more important, this trend will only increase.

Cybersecurity isn't the only high tech sector to invest in right now. There's a revolution happening in manufacturing now, and you can get in early.