Three Cybersecurity Stocks To Consider As Cyberattacks Persist

In this article I use AAII’s A+ Investor Stock Grades to provide insight into three cybersecurity stocks gaining momentum from recent events. With the prevalence of cyberwarfare and the likelihood of the tactics used growing in complexity, should you consider these three cybersecurity stocks of Check Point Software Technologies
CHKP
, Fortinet
FTNT
and Tenable Holdings (TENB)?

Cybersecurity Recent News

Over the last year, Google’s
GOOG
Mandiant division revealed complex hacks into many U.S.-based firewalls. Specifically, the company was able to link these attacks to groups in China. These new cyberattacks are flying under the radar due to the complexity of their techniques. Mandiant believes that the extent of these attacks is far greater than what it currently knows.

In January, Fortinet was warned of an attack that targeted a bug in its firewall software. This attack was linked to Chinese hacking groups. Fortinet released an analysis of the attack detailing that the complexity of it suggests an advanced hacking group.

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, 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 great value to criminals and evildoers, which is why it is important to protect it using strong cybersecurity measures and processes.

Other countries are capable of massive cyberattacks as well. During the beginning of Russia’s invasion of Ukraine, Russia 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, or if it were to make moves against NATO powers like the U.S., Germany, France and the like.

According to The Wall Street Journal, China has denied its involvement in hacking into businesses or governments in other countries. However, the sophistication, profile of the attacks’ victims, level of resources and specific malware used by China-based hackers in the past says otherwise. Cybersecurity stocks have benefited from the possibility of more online attacks. Firms such as those in this article might be of interest to 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 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, the 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 31, which is considered to be expensive. Check Point Software’s Value Score ranking is based on several traditional valuation metrics. The company has a rank of 84 for the price-to-sales (P/S) ratio, 10 for shareholder yield and 52 for the price-to-free-cash-flow (P/FCF) ratio. The company has a price-to-sales ratio of 6.77, a price-to-free-cash-flow ratio of 17.5 and an 8.1% 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 1.96. The ratio of price to free cash flow (the lower the better) is 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) ratio, the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda) and price-earnings (P/E) ratio.

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.

Check Point Software ranks strongly in terms of its buyback yield and return on invested capital, ranking in the 94th and 97th 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 return on invested capital of 207.6% exceeds the industry average of 20.3% 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 change in total liabilities to assets, in the 46th percentile.

The company has a strong Momentum Grade of B with a score of 62, driven by strong relative price strength in the second quarter of 2022 and for the weighted four quarters. Check Point Software also has a Growth Score of 89, which is considered very strong. The company does not currently pay a dividend.

Fortinet (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 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 2022, products were 40% of revenue and services were 60% of sales. The California-based company sells products worldwide.

Fortinet has an A+ Growth Grade of A. The company reported fourth-quarter 2022 revenues of $1.28 billion, up 33.1% from $963.6 million in the prior-year quarter. The company reported quarterly diluted earnings per share of $0.44, growing 76% from $0.25 per share year over year. Fortinet has a rank of 50 for its five-year sales growth rate of 24.2%. This is above the sector median of 8.8%. It also has a rank of 87 for year-over-year sales increases over the last five years. The components consider a company’s success in growing its sales and operating cash flow 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 2022 of 12.2%, and in the prior quarter reported a positive earnings surprise of 20.9%. Over the last month, the consensus earnings estimate for the first quarter of 2023 has increased 0.1% to $0.287 per share due to 18 upward revisions.

The company has a very strong Quality Grade of A based on a return on assets rank of 93. 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 15.2% return on assets, which is above the sector median. It also has very strong accruals to assets (change in working capital minus change in cash minus change in depreciation all divided by change in total assets) rank of 80.

Fortinet is a current holding in the Stock Superstars Report portfolio. It has a Momentum Score of 81, which is considered very strong, and does not currently pay a dividend.

Tenable Holdings (TENB) provides 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, the Middle East, Africa and Asia-Pacific.

Tenable Holdings has a Momentum Grade of B, based on its Momentum Score of 70. This means that it ranks in the second tier of all stocks in terms of its weighted relative strength over the last four quarters. This score is derived from a high relative price strength of 17.2% in the most recent quarter, offset by low relative price strengths of –0.2%, –20.9% and –1.0% in the second-, third- and fourth-most-recent quarters, respectively. The ranks are 85, 57, 21 and 56 sequentially from the first quarter. The weighted four-quarter relative price strength is 2.5%. 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 weighting 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 –7.0% and a change in total liabilities to assets of 9.4%. The company has a strong Growth Grade of B, with a score of 74. It does not currently pay a dividend.

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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