When a particular industry isn’t performing all that well, it takes a certain type of stock market participant to invest in it; a shrewd one. After all, the key to being a successful investor is to go against the trends, rather than with them. Of course, it goes without saying that the requisite research has to be carried out before such a decision is undertaken. Cyber-security is one space that has been battered down, but the increase in cyber crime (one of the biggest cyber heists ever, a $101 million theft involving Bangladesh’s central bank and the Federal Reserve Bank of New York occurred just recently), improvement of fundamentals, and resumption of M&A activity in this area led Goldman Sachs to launch coverage on it recently with a bullish outlook. With that in mind, we decided to provide a list of the top cyber-security stocks in terms of their popularity among the top hedge funds in our database, who have carried out extensive due diligence before investing in these firms.
At Insider Monkey, we track around 785 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).
#4 Barracuda Networks Inc (NYSE:CUDA)
– Investors with Long Positions (as of December 31): 15
– Aggregate Value of Investors’ Holdings (as of December 31): $44.18 Million
If considering the recent stock and hedge fund action on Barracuda Networks Inc (NYSE:CUDA), it would seem that the company is thriving. The firm’s stock price appreciated by about 20% during the fourth quarter, while the number of hedgies invested in the company rose by one and the aggregate value of their investments almost doubled. However, a slightly longer time horizon paints the picture of a struggling business. Over the last 12 months shares have cratered by nearly 60%. According to reports in early February, the data storage services provider was looking for potential buyers with the help of Morgan Stanley (NYSE:MS). Although a bit speculative, this could serve as a strong play for investors, especially considering the company’s low stock price. According to a recent 13G filing, Ahmet Okumus‘ Okumus Fund Management holds about 3.73 million shares of Barracuda Networks Inc (NYSE:CUDA), representing 7.03% of the company’s outstanding float.
#3 Fortinet Inc (NASDAQ:FTNT)
– Investors with Long Positions (as of December 31): 25
– Aggregate Value of Investors’ Holdings (as of December 31): $201.86 Million
Hedge fund interest in the $5.03 billion provider of cyber security solutions to enterprise, service providers and government organizations dropped sharply during the October-to-December period, as the number of funds holding the company in their portfolios dropped by 11 and the value of their aggregate investments slid by 46%. Although down by 16% over the last year, Fortinet Inc (NASDAQ:FTNT)’s shares have risen by more than 5% since the end of January, when the company delivered financial results for the fourth quarter that included EPS in-line with estimates and revenue that beat expectations. Furthermore, solid guidance for the full 2016 fiscal year and a $200 million share buyback program provided further impetus to the stock price. Anand Parekh‘s Alyeska Investment Group initiated a position in Fortinet Inc (NASDAQ:FTNT) during the fourth trimester of some 1.36 million shares.
The top two cyber-security plays are revealed on the next page.