Triple Play on Cyber Security

03/17/2015 9:00 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

Computer hacking—and the enormous threat it poses to individuals, companies, and governments—is a big and ever-present downside to the Internet age, asserts Stephen Leeb, editor of The Complete Investor.

The urgent need to protect information has spawned a burgeoning cyber security industry dedicated to keeping secrets and data safe.

Given the potential for havoc that computer hackers can wreak, it’s no exaggeration to view this as comparable to fighting a war. We think investors should have a stake in this war, as long as they’re careful to back the right warriors.

The best approach is to focus on companies that have been through more than one war and are still standing. If anything, be more conservative in this arena than in others, casting a skeptical eye on new companies and on companies whose stock price is valued based on expectations of explosive long-term growth.

The stocks below are all reasonably valued in view of solid long-term records and reasonable future PEG ratios and each has a high free cash flow yield.

Despite its relatively small size—$3 billion in revenues—CACI International (CACI) is a true franchise, defined as having a strong or controlling position in an area with major barriers to entry.

With more than 20 years of carrying out sensitive military assignments, CACI is always a leading contender for highly classified projects, including cyber protection and ferreting out cyber criminals.

The company’s unique position in a broad swath of highly sensitive government work—focused mostly on the Department of Defense—has translated into consistent low-teens growth over the past 15 years, despite defense budget cuts.

Its stunningly high free cash flow yield—a long-term characteristic—will translate into share repurchases and niche acquisitions. Buy the stock for its exceptional long-term record and potential.

Raytheon (RTN) is the defense company with the greatest electronic sophistication and the one that—via acquisitions and internal growth—has been most dynamic in cyber security.

Its intelligence and information division, devoted mainly to cyber issues, has more than tripled in size during the past four years. The other three divisions of this major defense player are also critical in an increasingly conflict-prone world.

One of the most widely recognized players in cyber security is Check Point Software Technologies (CHKP) which provides enterprise software systems dedicated to detecting and eliminating cyber threats.

Measured by market cap and revenues, it’s the largest player in that arena. It has the leading market share in corporate firewalls and offers the most scalable architecture.

Growth has accelerated over the past five years, suggesting that our projection of 13% growth could prove conservative. As a core holding in cyber security, Check Point is the clear choice.

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