Three Cybersecurity Stocks to Consider as Cyberattacks Continue
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three cybersecurity stocks gaining momentum from recent events. With the prevalence of cyber warfare and the likelihood of the tactics used growing in complexity, should you consider these three defense stocks of Check Point Software Technologies Ltd., Fortinet Inc. and Tenable Holdings Inc.?
Cybersecurity Recent News
In the last few weeks, Russia has launched a plethora of attacks on Ukraine, and possibly globally, in cyberspace. This has not been uncommon for the Russians over the past decade, with state-sponsored hackers disrupting companies and even countries through cyberattacks. This has only reinforced the importance of cybersecurity and firms that perform key functions to defend the electronic systems and digital property of nations and companies.
Cybersecurity can be described as the collective methods, technologies and processes to help protect the confidentiality, integrity and availability of computer systems, networks and data against cyberattacks or unauthorized access. The main purpose of cybersecurity is to protect all organizational assets from both external and internal threats as well as from disruptions caused by natural disasters. Given the rapidly evolving landscape and the ever-increasing adoption of software across various sectors including finance, government, military, retail, hospitals, education and energy to name a few, more and more sensitive information is becoming digitized and accessible through wireless and wired digital communication networks and across the omnipresent internet. All this highly sensitive information is of a great value to criminals and evil doers, which is why it is important to protect it using strong cybersecurity measures and processes.
Russia has shown how disruptive its cyberattacks can be, dislodging entire financial systems, locking government sites, disarming militaries, causing power outages and controlling media in a short period of time. All of these events have been experienced in Ukraine, many related to the subsequent invasion.
Russia has caused power outages, attempted government computer takeovers, disabled government and business websites and made it impossible for Ukrainian citizens to take cash from banks and ATMs. It shows how easily Russia could make similar moves if expansion were attempted in countries such as the Baltic states, Poland or Georgia. Additionally, it shows the possible lack of safety if Russia were to make moves against NATO powers like the U.S., Germany, France and the like.
In light of recent events, cybersecurity stocks have benefited from the possibility of more online attacks. Cybersecurity stocks have rallied in the preceding weeks amid poor overall market conditions. According to The Wall Street Journal, experts in cybersecurity have warned that companies should prepare for cyber retaliation for U.S. sanctions on Russian financial institutions, sovereign debt and elite individuals. Cybersecurity firms such as those in this article might be of interest to technology investors.
Grading Cybersecurity Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three defense stocks — Check Point Software, Fortinet and Tenable Holdings — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Cybersecurity Stocks
What the A+ Stock Grades Reveal
Check Point Software Technologies Ltd. (CHKP) is a pure-play cybersecurity vendor. The company offers solutions for network, endpoint, cloud and mobile security in addition to security management. It develops, markets and supports a range of products and services for information technology (IT) security. It offers enterprises a platform to deploy independent, modular and interoperable security applications (software blades), such as firewall, virtual private network (VPN), intrusion prevention system (IPS), application control, anti-bot, antivirus, data loss prevention (DLP), policy management, event analysis or multi-domain management. These product offerings are grouped into functional packages to address specific security issues. Check Point Software sells to enterprises, businesses, and consumers. At the end of 2020, 45% of its revenue was from the Americas, 43% from Europe and 12% from Asia-Pacific, Middle East and Africa. The firm, based in Tel Aviv, Israel, was founded in 1993 and has about 5,000 employees.
Check Point Software has a Value Grade of D, based on its Value Score of 64, which is considered to be expensive.
Check Point Software’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 82 for the price-to-sales (P/S) ratio, 13 for shareholder yield and 48 for the price-to-free-cash-flow (P/FCF) ratio (remember, the lower the score the better for value). The company has a price-to-sales ratio of 8.40, a price-to-free-cash-flow ratio of 16.8 and a 4.6% shareholder yield. A lower price-to-sales ratio is considered better, and Check Point Software’s price-to-sales ratio is above the sector median of 2.94. The ratio of price to free cash flow (the lower the better) and shareholder yield are both significantly better than the sector median. Cybersecurity stocks have been outperforming the market lately and therefore are more likely to be graded as expensive.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-to-book-value (P/B), enterprise-value-to-EBITDA and price-earnings (P/E) ratios.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Check Point Software has a Quality Grade of A with a score of 98. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its buyback yield and return on invested capital, ranking in the 94th and 96th percentiles of all U.S.-listed stocks, respectively. Return on invested capital is the amount of money a company makes that is above the average cost it pays for its debt and equity capital. Check Point Software’s 190.5% exceeds the industry average of 18.4% by a significant margin. This indicates that the company is efficiently allocating capital under its control to profitable investments. However, it ranks poorly in terms of its changes in total liabilities to assets, in the 45th percentile.
The company has a very strong Momentum Grade of A with a score of 89, driven by strong relative price strength in Q1 and for the weighted four quarters. Check Point Software also has a Growth Score of 46, which is considered average. The company does not currently pay a dividend.
Fortinet Inc. (FTNT) is a cybersecurity vendor that sells products, support and services to small and midsize businesses, enterprises and government entities. Its products include unified threat management appliances, firewalls, network security and its security platform, Security Fabric. Its cloud security offerings are available for deployment in public and private cloud environments, including Amazon Web Services (AWS), Microsoft Azure, Google Cloud, Oracle Cloud, Alibaba Cloud, IBM Cloud and VMWare Cloud. It also offers managed intrusion prevention system (IPS) and web application firewall (WAF) rules delivered by FortiGuard Labs as an overlay service to native security offerings from AWS. Its public and private cloud security solutions, including virtual appliances and hosted solutions, cover the capabilities of the Fortinet Security Fabric platform. Its network security appliances are managed by its FortiOS network operating system. Services revenue is primarily from FortiGuard security subscriptions and FortiCare technical support. At the end of 2021, products were 38% of revenue and services were 62% of sales. The California-based company sells products worldwide.
Fortinet has an A+ Growth Grade of B. The company reported fourth-quarter 2021 revenues of $964 million, up 29% from $748 million in the year-ago quarter. The company reported quarterly diluted earnings per share of $1.19, growing 34% from $0.89 per share year over year. Fortinet has a score of 98 for the diluted EPS five-year growth rate, with a rate of 81.9% that is above the industry average of 13.8%. It also scores an 89 for operating cash five-year growth rate, with a 34.1% rate that exceeds the industry average. The components consider a company’s success in growing its sales, earnings per share and operating cash on a year-over-year basis for the latest reported fiscal quarter and on an annualized basis over the last five years.
Earnings estimate revisions offer an indication of how analysts are viewing the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of B, which is considered positive. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
The company reported a positive earnings surprise for fourth-quarter 2021 of 7.2%, and in the prior quarter reported a positive earnings surprise of 5.5%. Over the last month, the consensus earnings estimate for the first quarter of 2022 has fallen 13.5% to $0.794 per share due to 26 downward revisions.
The company has a strong Quality Grade of B based on a return on assets score of 87. The return on assets indicates how profitable a company is in relation to total assets. The higher the return on assets, the more efficient and productive a company is at managing its balance sheet to generate profits. It has a 10.7% return on assets, which is above the industry average. It also has very strong accruals to assets (change in working capital minus change in cash minus change in depreciation all over change in total assets) score of 84.
Fortinet is a holding in the Stock Superstars Report portfolio. It has a momentum score of 90, which is considered very strong, and does not currently pay a dividend.
Tenable Holdings Inc. (TENB) is engaged in providing solutions for a new category of cybersecurity it calls “cyber exposure.” The company’s platform provides a range of visibility into security issues, such as vulnerabilities, misconfigurations, internal and regulatory compliance violations and other indicators. The enterprise offerings include Tenable.io and SecurityCenter. Tenable.io manages and measures cyber exposure across a range of traditional IT assets, such as networking infrastructure, desktops and on-premises servers. SecurityCenter is built to manage and measure cyber exposure across traditional IT assets and can be run on-premises, in the cloud or in a hybrid environment. It serves various industries such as finance, health care, retail, energy and others. The company has a presence in the Americas, Europe, Middle East, Africa and the Asia Pacific.
Tenable Holdings has a Momentum Grade of A, based on its Momentum Score of 88. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. This score is derived from high relative price strengths of 25.8% and 1.6% in the first and third quarters, offset by moderately low relative price strengths of –0.7% and –4.3% in the second and fourth quarters, respectively. The scores are 89, 66, 79 and 54 sequentially from the first quarter. The weighted four-quarter relative price strength is 9.7%. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
Tenable Holdings has a Quality Grade of D based on a weak return on assets of –4.8% and a change in total liabilities to assets of 39.5%. The company has an average Growth Grade of C, with a score of 59. It does not currently pay a dividend.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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