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Two Top Techs in Cybersecurity

09/17/2018 5:00 am EST

Focus: TECHNOLOGY

Stephen Leeb

Founder and Research Chairman, Leeb Group

Two top picks in the commercial cybersecurity area are Fortinet (FTNT) and Palo Alto Networks (PANW). Somewhat ironically and perhaps not so incidentally the leaders of both companies were educated largely abroad, asserts Stephen Leeb, growth stock expert and editor of The Complete Investor

Fortinet was founded by two Chinese brothers. The tech expert of the two, Ken Xie, received his undergraduate degree from Tsinghua University, which accepts roughly one of 1,000 applicants. Palo Alto’s CEO was educated in India. If as many assume the U.S. does have a lead in AI (and we’re not convinced it does), we can thank the East.

Judging firewalls is inherently difficult since by their nature they have to be opaque. So in assessing a cybersecurity company you need to rely on customer satisfaction surveys and on the company’s financial results. Fortinet has consistently ranked at the top of customer sentiment surveys, which was a major reason for our original recommendation.

Our expectation, which happily has been met, was that the company’s heavy investments in product development, which at the time had kept earnings growth moderate, would pay off in a big way. Today Fortinet, whose revenues have multiplied more than sixfold since 2009, has a forward earnings trajectory that should exceed 20% and perhaps approach 25% or even higher.

As an added kicker, it has high free cash flow and nearly $1.5 billion in net cash, with a debt-free balance sheet. Given the company’s exceptional financial position and skill sets, it remains a strong recommendation despite having more than doubled since we first bought it.

Palo Alto is comparably attractive and has a similar business model, with net cash after all debt positive. If you own it, we see no need for you to switch.

Palo Alto is larger than Fortinet, which has the advantage of giving it a larger base of client companies that are likely to renew their contracts. But based on surveys and performance metrics related to their firewalls, Fortinet appears to have a slight edge.

In addition, and one reason we picked it initially, as a smaller company it has more room to grow. But both are great companies that give you high-quality stakes in U.S. commercial cybersecurity.

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