What Hedge Funds Think of These Five Cybersecurity Stocks

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The cybersecurity sector has had a wild ride in 2015. The numerous hack attacks that took place in late-2014 and early-2015 helped push cybersecurity stocks to the stratosphere during the first half of the year, but the tide reversed in the second-half of 2015 and several stocks from the sector are now trading flat or in the negative for the year. In mid-June the PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) was trading with year-to-date gains of over 30%, but since then it has lost all those gains and currently trades down almost 3% year-to-date. Taking into account that most cybersecurity stocks have now cooled off and are trading at lower prices, we at Insider Monkey thought of compiling a list of cybersecurity stocks based on their relative popularity among hedge funds and thereby make the process of stock selection easier for our readers who are thinking about going long the industry. Read further to know what hedge funds thought of the five prominent players in the cybersecurity industry going into the fourth quarter.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. S&P 500’s 49% gain) over the last 37 months (see the details here).

#5 Barracuda Networks Inc (NYSE:CUDA)

-Hedge Funds with Long Positions (as of September 30): 14

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $22.3 million

Barracuda Networks Inc (NYSE:CUDA) remained largely flat during the first-half of the year, but the disappointing quarterly numbers the company released in July and September caused its stock to slump hard and it now trades down almost 50% year-to-date. This underperformance weighed heavily on the stock’s popularity among hedge funds during the third quarter with two fewer funds, among the 730 we cover, reporting a stake in the company at the end of the third quarter and the aggregate value of investors’ holding in the company seeing a decline of nearly 32% during the same period. On November 1, analysts at BWS Financial initiated coverage on the stock of Barracuda Networks Inc (NYSE:CUDA) with a ‘Buy’ rating and $26 price target, which represents a potential upside of over 40% from the stock’s current trading price. Anand Parekh‘s Alyeska Investment Group made a 30-fold increase in its stake in Barracuda Networks to 338,555 shares during the July-September period.

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#4 Fortinet Inc (NASDAQ:FTNT)

-Hedge Funds with Long Positions (as of September 30): 36

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $370.6 million

Though the stock of Fortinet Inc (NASDAQ:FTNT) has fallen more than 30% since it released its last quarterly numbers in October, owing to the rise it saw during the first seven months of the year, the stock is still trading up2.5% year-to-date. The performance of the stock during the first half of the year enticed many hedge funds to go long in the stock during the third quarter. The number of funds covered by us that reported owning a stake in Fortinet Inc (NASDAQ:FTNT) increased by 10 at the end of the third quarter and the aggregate value of hedge funds’ holdings in the company also increased by almost $50 million during the same period. A few days after the company released its third quarter numbers, on October 28, analysts at Needham & Company LLC reiterated their ‘Buy’ rating on the stock, but lowered their price target on it to $43 from $54. Billionaire Israel Englander‘s Millennium Management was one of the hedge funds that initiated a stake in Fortinet during the third quarter; it purchased 464,519 shares of the company during that period.

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