Profit from Outsmarting the Hackers

04/02/2013 7:45 am EST


Michael Brush

Columnist, MSN Money

Cybersecurity is serious business, and these six companies are making money from beating the hackers at their game, writes Michael Brush of MSN Money.

Beyoncé's bank account info lands online, along with Michelle Obama's. Intruders break into the computers of the Federal Reserve.

Consumer Web sites of giants such as JPMorgan Chase (JPM) are shut down. Twitter gets hacked, exposing account passwords of a quarter-million people. Spies roam freely in New York Times (NYT) computers, presumably looking for story sources.

The list of shocking computer-security breaches goes on and on, and the stakes are high. So far, no one has shut down a power grid or messed with a nuclear reactor—that we know of—but given the prowess of global hackers, these are risks.

Chalk up the persistent security problems to these three trends, which aren't going away:

  1. As companies have gotten more Internet-savvy over the past ten years, their computer networks have become more open. They link their networks to the computers of business partners. They store data in "the cloud," or server farms, often run by third parties. Mobile devices have morphed into minicomputers, so more employees are using their personal phones and tablets for work.
  1. In the old days, "script kiddies" took down prominent Web sites for the bragging rights. But as sensitive business and government secrets moved online, along with access to cash in accounts, more thieves, mobsters, and international spies are pouring big money into hiring the best talent to hack computers.
  1. I have no doubt that the bad guys buy all the best computer defenses to study them—to learn how to defeat them. But network cops get no advance look at the thieves' tool chests. So it's like a poker game, where only one side can see the other's cards. It's pretty easy to guess who has an edge in that game.

All that seems to assure ongoing security attacks—and therefore a steady flow of money into network security for years to come.

Given how scary all of this is, there have to be some great investing angles, right? There are, and here are my "Security Six," in two groups. One is for the growth crowd, and the other pair are slowpoke old-timers in the sector that may bounce back as they roll out new products and revamp their businesses.

The first two are sizzling growth plays.

Palo Alto Networks (PANW) is a recent initial public offering, and one of the hot new kids on the block in firewalls—or perimeter defenses. It sells devices with software that lets companies watch and control who and what gets on their networks...without bogging down the system. Its specialty is examining apps—a sweet spot in security.

Fourth-quarter sales grew an astonishing 70% as the company took business from such competitors as CheckPoint (CKP). It added more than 1,000 new customers, taking the total count above 11,000.

All that makes Palo Alto a potentially great investment, but there are risks. At $55 a share, this stock trades at 11.8 times sales, compared with five times sales at Google (GOOG). A rich valuation doesn't mean the stock can't go higher, given the sizzling growth.

Meanwhile, Sourcefire (FIRE) offers an intrusion detection and prevention system called Agile Security. It protects company networks from inside, as opposed to at the perimeter. Think of it as a kind of second line of defense.

The company also has been expanding into firewalls and advanced anti-malware weapons. Growth here is hot. Sales advanced 35% last year, and the company recently guided for 25% sales growth this year.

The company also has the biggest exposure to the federal government, which is a plus. Sales to the federal government grew 41% in the fourth quarter.

To read the rest of Michael’s cybersecurity picks, visit MSN Money here...

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