Contrarian Call on Cyber Security

04/07/2015 8:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Just within the past year and a half, the number of major corporations that have fallen victim to cyber attacks is nothing short of alarming, asserts Bernie Schaeffer, editor of Schaeffer Investment Research.

So, perhaps it was inevitable that we would see the launch of the PureFunds ISE Cyber Security ETF (HACK), an exchange-traded fund based on the companies that swoop in to provide damage control and preventive services for those targeted by hackers.

HACK, with its on-the-nose ticker, settled at $25.10 on its first day of trading this past November and more recently has been testing its mettle around the $30 level.

Meanwhile, speculative interest on HACK has exploded and primarily on the call side of the equation. During a period of time in which HACK gained about 10%, open interest on the fund surged 458%.

Taken out of context, it may seem as though the HACK bandwagon has quickly erupted from virtually nonexistent to bulging at the seams, but note that total open interest is still at a relatively low absolute level.

This suggests that we may yet be in the early innings of this trend. In fact, among HACK's top ten holdings is relative newcomer FireEye (FEYE), which appears to have the near-textbook makings of a contrarian play.

The company has been called in to address some of the higher-profile corporate hacking cases, including the Sony debacle, and the shares have gained nearly 44% in value year-to-date (with just under two full months of trading on the books).

Yet against this backdrop of strong demand and breakout price action, there are signs of significant skepticism toward FEYE.

For starters, a full 45% of analysts maintain a hold or sell rating on the stock and the average 12-month price target of $43.35 is south of FEYE's current price.

Elsewhere, we find 15.7% of FEYE's float in the hands of short sellers. And options traders are similarly unimpressed, with Schaeffer's put/call open interest ratio in the 98th annual percentile.

For those intrigued by the prospects for cyber security firms, this is one stock that's backing up the hype with its solid performance.

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