Cyber Threats and Opportunities

10/09/2015 10:00 am EST


Jim Powell

Principal Analyst, Global Changes & Opportunities

Cyber threats, unfortunately, are a growth industry according to Jim Powell. The editor of Global Changes & Opportunities Report believes that investments in this sector could lead to bonanza gains for long-term investors. Here, he discusses his favorite stocks and ETFs for those seeking exposure to this market.

Steven Halpern:  Joining us today is Jim Powell, an expert on international investing and geo-politics, as well as the editor of Global Changes & Opportunities Report. How are you doing today, Jim?

Jim Powell:  Fine, Steven, and how are you?

Steven Halpern:  Very good, thank you for joining us. Today we're going to focus on a developing industry where you see significant long-term potential and that's the areas of cyber-security and cyberwarfare.  Before we look more deeply at the potential opportunities here, you emphasize that there are common characteristics between these two areas, yet, they're, in fact, two distinct markets. Could you explain that?

Jim Powell:  Yes, so far we have-we being the United States and most other countries-have been on the defensive in regards to computer hackers and more sophisticated penetrations of our computers.

The computer security industry has stepped into that need and has come up with many, many different ways to protect computers, but there are many in the Pentagon and elsewhere in Washington who think it is time to take the gloves off and to start fighting back instead of just being on the defensive.

And so that it giving rise to the computer warfare-the cyberwarfare-industry. It's all hush-hush. A lot of the work's being done by NSA people behind closed doors but there are beginning to be some private companies that are getting interested in that as well.  

I think you put the two of them together and you've got just a whole new investment area and investors really should have some stake in it because it has a potential to be huge. In fact, one person at the Pentagon said, look, before this is over, this whole cyber area is going to be as big as the Manhattan Project was in World War II.  

Steven Halpern:  Now, to highlight the potential risks, in a recent report you touched on a series of coincidences related to recent cyber-attacks that you suggest might not be so coincidental. Could you explain your thoughts there?  

Jim Powell:  Yes, within a two-week period there was a four-hour shutdown of the New York Stock Exchange and that's really serious. I mean, you know, that's the heartbeat of America's financial system.  

There was also a 90-minute shutdown of United Airlines, I'm talking coast to coast shutdown. Anthem Blue Cross-Blue Shield had 80 million records stolen.  

The office of personal management, which is a really important government agency had a penetration that took 22 million records, then the IRS lost 100 million records and that's just the biggest ones.

And I don't think that that's a coincidence at all.  I think that that's a directed attack and we need to treat it with the sort of seriousness it deserves.

Steven Halpern:  Now, to combat cyber threats, you point out that the government, in part due to many outdated computers systems, needs to really play catch-up in order to be more effective against these threats.  How a big a market, if not market opportunity does this present?


Jim Powell:  It's growing like topsy. We spent $2.4 billion in 2014.  It'll be at least twice that before this year is out, and, as I mentioned earlier, it's growing so quickly that I think before the whole thing is over we're going to have a program just as big as the Manhattan Project.  

This is a whole new area of security and warfare and any small country can get into it. You don't have to be able to build aircraft carriers to be a potent advisory in the cyber area, so you have countries like Iran, for example, that have very extensive cyber systems that are being used around the world.

So, I just think that this is just enormous and that investors should get in on the ground floor.  

Steven Halpern:  Now, you suggest thatinvestments made today have the potential to become long-term winners and one stock you recently called your favorite in the area is CACI International (CACI).  What's the story here?  

Jim Powell:  They have contracts with the government already to build computer systems and supply software and so forth. They have contracts with Homeland Security, they have contracts with the Department of Defense, the US Navy, and many other agencies.  

In addition, they have a lot of private work in the commercial sector.  Now, because of their strategic importance as suppliers of secure computer systems, they're in the ideal position to expand into the cyber-security area, and in fact that have, and that's growing very quickly.  

For investors who are looking for a conservative and diversified approach to this area, I think that's a very good investment.

Steven Halpern:  Now, you've also pointed to two more speculative ideas, FireEye (FEYE) and Palo Alto Networks (PANW).  Could you share your thoughts on these firms?  

Jim Powell:  Yes, they're smaller but very, very fast growing specialist companies.  Palo Alto increases revenue something like 59% in the fourth quarter.

And FireEye repaired the data breaches at Sony, and at Anthem, and Home Depot, and a lot of other companies that have had penetrations and they're both growing like topsy.  I think they have tremendous potential.  

I wouldn't try to distinguish between them if I were going to be on the smaller side of the industry in terms of market cap.  I'd buy a little of both.

Steven Halpern:  Now, for investors who want broad diversification to these markets without the inherent risks of individual stocks, you've also suggested a pair of exchanged traded funds.  Could you tell our listeners about the PureFunds Cyber Security (HACK) and the First Trust NASDAQ Cyber Security (CIBR) ETFs?

Jim Powell: Yes, the PureFunds Cyber Security ETF-symbol is HACK-how appropriate. They're probably the more conservative of the two ETFs. They have a very broad investment base including a lot of large companies.

First Trust NASDAQ Cyber Security, as its name suggests, invest primarily in the NASDAQ companies and many of them are smaller and I would rate that as a little bit more speculative.  

Steven Halpern:  But for somebody with a long-term focus, you believe these two funds would offer exposure to the growth you foresee in these markets?

Jim Powell:  Yes, and by the way almost all the cyber security companies now are really quite good values compared to a month or so ago.  

In addition to the market slide, investors seems to think that the sector somehow gotten ahead of itself, and so a lot of prices are down, so if you're thinking about making an investment, I think this would be a good time to do it.  

Steven Halpern:  Again, our guest is Jim Powell of Global Changes & Opportunities Report.  Thank you for your time today.

Jim Powell:  You're most welcome.  

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