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Cybersecurity stocks in an insecure world

Waves of unsettling cyberattacks may be bad news for most of us. But they're good news for cybersecurity companies.

The global cost of cybercrime for consumers hit $110 billion a year, according to a report released in September 2012 by Symantec Corp. in Mountain View, Calif. So everyone seems to be turning to cybersecurity firms both large and small for protection.

To fight off computer and Internet crime, these cybersecurity players are quickly developing ever more sophisticated versions of firewalls, Web filters and anti-virus software. And they're becoming must-have technologies for companies, consumers and the government.

Budding market

The result is that many cybersecurity companies are seeing strong growth. Here are the best ways to play this budding market sector.

Company network security. There's phenomenal growth in this niche. Daniel Ives, a senior analyst at Arlington, Va.-based FBR Capital Markets, forecasts that company security budgets will rise 11 percent this year. "That rising tide will lift all boats," says Ives, who advises investors to add cybersecurity stocks to their portfolios. He especially likes cybersecurity companies that sport strong revenue growth, solid products and good cash flow.

For example, Check Point Software Technologies Ltd. of Tel Aviv, Israel, which makes a wide range of security software, is the market leader in network security, Ives says. The company has strong products and a large existing install base that creates steady revenues. Fortinet Inc. in Sunnyvale, Calif., also is a strong cybersecurity stock in the critical network security market. It is gaining market share from competitors, has strong proprietary technology, and its revenue is expected to grow by 18 percent in 2013, Ives says.

Palo Alto Networks in Santa Clara, Calif., is a cybersecurity market darling, grabbing market share in the niche of computer firewalls, Ives says. The company, which went public last year, is rapidly growing, with projected revenue growth of 40 percent in 2013 and also in 2014, according to Ives.

Consumer cybersecurity. This is a very competitive market, says Andrew Lange, an associate analyst at Morningstar. One reason is that cybersecurity companies can undercut each other in their pricing. For example, Microsoft offers free services, he says. Still, Symantec Corp., the world's largest maker of anti-virus software for home computers, has a leg up in this market as it owns the well-known anti-virus brand Norton.

"Symantec makes go-to cybersecurity products," he says.

The company also has hired a new CEO and has moved in new product directions, Lange says. A slew of smaller, foreign-based Internet security software companies such as Amsterdam-based AVG Technologies and Beijing-based Qihoo 360 Technology Co. Ltd. also offer home computer security tools, but Lange advises investors to stay with a familiar name. "Stick with market leaders like Symantec that provide best-in-class security," Lange says.

Cyberdefense companies. After large federal budget cuts, cyberdefense is one of the few growth areas in government spending. The challenge for investors is finding which of these cybersecurity stocks to buy and which to avoid.

George Price, senior vice president at BB&T Capital Markets in Washington, D.C., says to avoid two big cyberdefense firms -- CACI International Inc. in Arlington, Va., and Booz Allen Hamilton Inc. They're both dragged down by diversified businesses that include defense spending, which government cuts are hitting the hardest.

Swami Shanmugasundaram, an equity analyst at Morningstar, agrees with Price. Shanmugasundaram says CACI faces a lot of headwinds due to government cutbacks. "So CACI is having a hard time finding revenue growth," he says.

Smaller, less diversified players may be better choices. For example, Tom Kerr, an investment adviser at Rocky Peak Capital Management LLC in Calabasas, Calif., says ManTech International Corp. in Fairfax, Va., which makes cybersecurity tools for the federal government and other clients, is highly profitable.

"ManTech sells to dozens of different government agencies, and there's much more potential business in the pipeline," he says. Also, the company's dividend yield was 2.9 percent in mid-August, he says.

KEYW Holding Corp. in Hanover, Md., is a fast-growing but much smaller contractor that has forged long-term cybersecurity contracts with the National Security Administration along with other federal agencies, Kerr says. Though the company isn't profitable yet, it isn't as vulnerable to federal budget cuts as defense contractors are, making it an attractive possibility for investors looking for small-cap growth stocks.

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