A Sleeper Stock in Cybersecurity That Suits Current Conditions

If you are a regular reader of my musings, you may know that I am a bit bearish at the moment. That is in part due to forty years of watching markets, which leads to the belief that stocks are currently responding to immediate conditions but are ignoring the longer-term potential impact of serious rate hikes and the rapid accumulation of government and personal debt. That doesn’t mean that we won’t be higher than current levels a year or two from now, nor does it necessarily mean that we will be lower in a week or two. It is just that at some point, there will be a price to pay, and that makes it impossible to be enthusiastic about the market in general at these levels.

There are, however, some sectors and industries where the long-term dynamic is so strong that none of that really matters, and where the pullback that I anticipated and that we have seen over the last month or so presents an opportunity. The most obvious of those, especially after Palo Alto Networks (PANW)’s blowout earnings after the close on Friday, is cybersecurity. As anyone with a computer knows all too well, cybersecurity is a constant battle that demands frequent updates and adjustments, as the bad actors seem to always be one step ahead of those attempting to police them. Ironically, that situation is good for the “police.” They may fail on a regular basis, but that just reminds everyone how much we need them.

PANW itself jumped more than 10% on those earnings and dragged other popular names in space, such as CrowdStrike (CRWD) and Zscaler (ZS) along with it. Those copycat moves, however, may prove to be unsustainable, or at least overdone. Palo Alto’s big beat on EPS came on revenue that only just met expectations. They did offer a rosy outlook, but the story was more about improved profitability than anything, and that doesn’t necessarily translate to better results for their competitors. That is why my preference would be for another company that is heavily involved in the cybersecurity business, but whose stock barely moved over the weekend: Cisco Systems (CSCO).

Cisco moving independently of the better known cybersecurity stocks is nothing new. It exists outside of that space, as its forward P/E of 13.6 versus values in the 50s and 60s for other, trendier names in the industry would indicate. For many, Cisco is still seen as a systems supplier and operator rather than a cybersecurity firm, but the two are inevitably intertwined these days. In fact, about 70% of Cisco’s revenue comes from it two cybersecurity-related divisions, so while it isn’t a pure play in the space, it is a company that will definitely benefit from the need for expanded security spending, and probably by more than some of the flashier names.

What you are not going to get with a long position in CSCO as opposed to some of the others is dramatic, short-term profit. The sheer size of the business makes triple digit percentage gains in a year just about impossible, but it also means that should the economy start to falter, as it logically will at some point, you won’t see a massive drop either. It is more of a “slow and steady” kind of thing, but that suits current conditions.

Cisco is a massive sleeper in cybersecurity. They aren’t thought of in that way, even though 70% of their $57 billion in trailing twelve month revenue is around sixteen times what a company like CrowdStrike brought in over the last year. Clearly, though, if Palo Alto’s earnings do point to a surge in cybersecurity spending overall, Cisco will be a big beneficiary and that, combined with the stock’s less volatile nature in uncertain times, makes it my unexciting, but logical pick in the space right now.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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