How I Picked A Cyber Security Growth Stock
2,472 VIEWS
Don’t Listen To Me, But Please, Hear Me Out: # 36
Shaheeda Abdul Kader, May 5 2021, Updated May 19 2021
How I Picked A Cybersecurity Growth Stock
In March 2021, I started researching cybersecurity stocks. I wanted to show you how I picked my favorite cybersecurity stock and how it is performing. But of course, the market through a wrench in my plans on May 4th, It has been volatile since then. Nonetheless, let me share the process I go through to pick stocks.
Why Cybersecurity Stocks?
Colonial Pipeline in the US paid hackers an eye-popping $90 Million in bitcoin as ransom payment.
There’s hardly been a month in the past decade that we’ve not heard of a major cybersecurity hack, data breach or ransomware attack.
No one’s safe. Not the big tech companies like Facebook, LinkedIn, Twitter, Marriott, Experion, Brokerage House, etc. Not even the most powerful governments are safe.
You can see an entire list of cyber attacks here.
Consequently, there are a great many companies & startups entering the cybersecurity space.
How Big Is It?
Depending on which research analyst you believe, Global cybersecurity market size is growing at a CAGR (Compounded Annual Growth Rate) of 10.9% to 12.5% and may reach USD 418.3 Billion by 2028.
Many of the publicly traded cybersecurity stocks have had phenomenal growths in stock price as well as earnings. Most of the big names are not profitable yet but most analysts are bullish about the future of these companies.
My Stock Pick
After my analysis I picked Cloudflare ($NET) on March 9 2021 for $69.12.
I was up 20% on May 3rd. Less than 2 months. Yay!
As on May 19th, my gains have reduced to 5%. So, er, you could say the market is having yet another hissy-fit.
Could I Have Done Better?
I compared many stocks as well as ETF’s
Here’s how they did.
I thought I was doing quite well until markets started doing the volatility dance from May 4th. My gains of 22% reduced to 5% in a matter of 2 weeks. Fortinet ($FTNT) and VM Ware ($VMW) were more consistent.
I am not impressed with any of the ETF’s.
Color me unimpressed with all of the ETF’s. These are all run by some of the biggest funds like Blackrock ($IHAK) and for the fees they charge, the returns aren’t impressive.
So Do I Suck At This?
As always, I like to look at my favorite S&P500 Index ETF or $SPY to see if I could have done better.
$SPY has historically been a safe bet. It may not grow exponentially, like some of the high flying growth stocks, but with consistent investing, and the magic of compounding, most investors would do well to have a portion of their portfolio in $SPY.
You can read more about why investing in index funds such as $SPY is good in this blog I wrote last year.
How Do I Know If I Picked a Good Stock?
Honestly, I don’t know if I picked the right stock. Based on my analysis and articles I read, I like the growth potential for $FTNT, $OKTA, $NET, and $VMW the most. $CRWD got too much hype so I am a bit weary, but I strongly believe most, if not all, security stocks will do very well in the next 3, 5 and 10 years.
It is good to look at historic performance as well as what the company’s most recent earnings reports say. Past performance is not a guarantee for the future. However, along with the earnings reports and forward looking statements, you could make an educated decision.
You can see below the massive growths most of the stocks have enjoyed since their IPO’s. If you looked at returns since IPO alone, you may be tempted to invest in $CSCO. While CSCO is a phenomenal company with a 30 year history, its performance over the last few years have been modest compared to its newer, shinier peers.
By no means is the cybersecurity ETF performance dismal. Its really up to your risk appetite whether to choose single stocks or ETF’s. It is highly unlikely that the ETF’s will beat the best performing stock within a theme (cyber security in this case). Equally, it is unlikely the ETF will perform worse than the worst performing single stock within the theme or sector.
Please note I have taken the adjusted closing price from Yahoo finance to calculate the above. The adjusted price takes into account all stock splits.
Research
How to choose among so many? I started reading Gartner research & articles about cybersecurity; what the strengths & weaknesses are for each.
I like this illustration. It’s a good data point to see who can provide a breath of service & who are playing in niche areas like say, “Identity Protection”.
Next, I looked at analyst reports. I used @SeekingAlpha (SA) & @KoyfinCharts (KF) @YahooFinance for my analysis
You need a paid subscription for certain features in SA. I like using it thus far.
After reading many articles I settled on the following for further analysis. Look at the approximate Market Cap in Mar 2021 along with their IPO date.
- $NET: $22.14 B; September 2019
- $CRWD: $43.57 B; June 2019
- $ZS: $24.68 B; March 2018
- $OKTA: $28.02 B; April 2017
- $PANW: $30.81 B; June 2012
- $FTNT: $28.48 B; November 2009
- $VMW: $61.21 B; August 2007
As you can see, some are older and some are fairly new. Most had a market cap in the $20+ Billion range.
$CRWD stands out because it’s a fairly new entrant with a hefty market cap of $43.57 Billion.
The question is which provides the greatest value for the greatest growth potential. I used SA to do a quick comparisons on each of these stock’s income statements, balance sheets, cashflow, profitability, growth, analyst ratings, total returns over the years, etc.
Here’s what an SA comparison looks like. I started researching in March. Here’s what SA’s report looked like on May 4th .
From Mar-May you can see ratings have changed more positive.
More Research
I always like to see how many analysts are covering the stock. Peter Lynch says the fewer the better. ?
$NET has 21 analysts covering which is fewest, but still it’s not small.
SA have their own quantitative formula to grade a stock on value, growth, profitability & momentum
$FTNT scores well on both Profitability & Momentum.
None of them scores well on value and that’s not surprising. These are growth stocks.
Here’s a video that I think will explain everything much better.
What Price To Pay?
In the table above, you can also see how the stock price compares to the 52 week high & low.
Except for $FTNT every stock is down in double digits from their 52 week highs which could mean that the price now may give us good potential for growth. #BTFD (Buy The F***ing Dip) right?
However, you can also see that all of the stocks are much higher than the their 52 week lows. So perhaps the dip is not low enough? These are just points to consider. If you believe in the company and are going to hold it for 3-5 yrs, these shouldn’t matter so much.
I like to look at the Revenue Growth, EBITDA and EPS Growths as well.
For example, if revenue is growing but EBITDA is not, that means their operating costs are increasing faster than revenue.
We can also look at Profitability, Gross Margins, Net Margins etc.
I spend more time on the Income Statements, Balance Sheets & Cash Flow Statements. I’m conservative, hence, debt worries me. I look at Debt/Equity and Debt/Free Cashflow ratios as well.
I picked $NET. What about you?
Final Thoughts
Picking individual stocks is very hard. As you can see, despite all the analysis I did, there were wild price swings in each of the stocks I analyzed. If you cannot stomach the volatility, but you still believe that cybersecurity is a good sector to invest in, then you can go for thematic ETF’s or Mutual Funds.
There are many cybersecurity themed ETF’s such as $IHAK, $BUG, $CIBR, and $HACK. They will give you a more modest return and may not be as volatile as individual stocks. However, in 2021, I $SPY (S&P 500 Index ETF) beat all of them.
As you can see in the table above only 2 ETF’s $BUG and $CIBR marginally outperformed $SPY in the past 12 months. Considering that these are professionally managed ETF’s with a management fee, $SPY seems like a safer bet. Even when you compare performance in the past 3 years, only CIBR significantly outperformed $SPY.
You can read more about why investing in index funds such as $SPY is good in this blog I wrote last year.
I usually blog about investing in the stock market. If you would like help on how to budget, save or invest more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at say@shaheedasays.com. I’d be happy to offer you my services. Please do check my other blogs here.
Disclaimer:
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself . I hope you will be empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me, and I’ll do my best to help you with your queries.
