Investing in Cybersecurity
So far in 2021, we have seen several high-profile cyberattacks take place, including the attacks against the Colonial Pipeline, Steamship Authority of Massachusetts, JBS (the world's largest meatpacker), and the Washington DC Metropolitan Police Department, just to name a few. Such ransomware attacks have increased in frequency and sophistication, highlighting the importance of cybersecurity in our society. As we've witnessed firsthand, attacks like these can significantly interrupt or even shut down critical infrastructure, creating shortages, increased cost of goods/services, financial loss due to shutdown of operations, and loss of money due to having to pay the ransom to the hackers. In fact, the World Economic Forum's 2021 Global Risks Report ranked "cybersecurity failure" as the fourth likeliest critical threat to the world within the next two years, behind infectious diseases, livelihood crises, and extreme weather events.
As the threat of cyberattacks increases, the focus on protecting computers, networks, programs, and data from unauthorized and/or unintended access has become more important than ever. In Washington, the White House and US Congress have made cybersecurity an important national policy issue. In May, President Biden issued the “Executive Order on Improving the Nation’s Cybersecurity,” calling for several changes to how the nation responds to and defends against cyber-attacks, as well as proclaiming that “the prevention, detection, assessment, and remediation of cyber incidents is a top priority and essential to national and economic security.” In addition to the executive order, the President and leaders of Congress have added a number of cybersecurity-related provisions in the Infrastructure bill. Furthermore, reports show that cybersecurity-related spending continues to rise across the government’s federal agencies and military (Department of Defense (DoD)). Cybersecurity spending has also increased outside of Washington, driven in part by the rise in the work from home trend, which has forced companies to pay for additional protocols and processes to protect confidential data. Bloomberg reports cybersecurity spending is expected to surpass $200 billion by 2024. Furthermore, recent research conducted by IBM in conjunction found that the average total cost of a data breach is $4.24 million in 2021, which is up from $3.86 in 2020. This study also reveals that the healthcare, financial, and pharmaceutical industries currently have the highest data breach cost per company among all industries (source: nasdaq.com/solutions/cybersecurity-indexes). The increase in the frequency of cyberattacks coupled with the rise of the financial losses and disruptions associated with each has caused cybersecurity to become a major concern for investors. In fact, many Environmental, Social, and Governance (ESG) frameworks now consider cybersecurity as a core component under “S,” or the social pillar.
With over 2,000 ETFs available to investors in the U.S. today, there are many ways to “play” the cybersecurity space through thematic funds such as the First Trust NASDAQ Cybersecurity ETF CIBR. CIBR is one of the highest-scoring cybersecurity funds in the NDW Database and seeks to track the performance of companies engaged in the building, implementation, and management of security protocols used to protect the integrity of data and network operations, and currently holds 36 stocks (source: ftportfolios.com). Since returning to a Point & Figure buy signal in April at $43.50, CIBR has given a total of four consecutive buy signals, with the most recent occurring in August at $50. In early September, CIBR notched a new all-time high at $52 before experiencing a brief pullback to the $48 level earlier this month. With recent market action, however, CIBR has reversed back up into Xs at $50, putting the fund three boxes from a fifth consecutive buy signal and a new all-time high at $53. Currently, CIBR carries a strong 4.54 fund score with a positive score direction of 1.84 and is outscoring the average technology fund (3.89). Additionally, CIBR trades well above the bullish support line that dates to April 2020. Those looking for cybersecurity exposure through a technically sound ETF may consider CIBR here as it trades near the middle of the 10-week trading band and is controlled by demand. From here, support can be found at $48, with further support offered at $47.50.
There are several names within CIBR that are actionable and offer technically sound pictures. One such stock is Cloudfare Inc. Class A NET, which notched a new all-time high today with a move to $144. This strong 5 for 5’er trades on a Point & Figure buy signal and sits well above its bullish support line that dates to May of this year. Currently, NET ranks in the top quartile of the computers sector matrix, making it one of the stronger names in this favored space, and has maintained a market RS buy signal since February 2020. Furthermore, monthly momentum just flipped positive, suggesting the potential for higher prices. The weight of the technical evidence is positive. Initial support is offered at $110, with further support found at $100. Earnings are expected on November 4, 2021.
Another actionable name within CIBR is Palo Alto Networks, Inc. PANW. PANW hit a new all-time high last week at $496, where it trades today on two consecutive Point & Figure buy signals. PANW ranks in the top quartile of the software sector matrix and has experienced three months of positive monthly momentum. Additionally, PANW continues to show superior strength versus the broader market and has maintained a market RS buy signal since April 2018. Overall, the weight of the evidence is positive, making new positions welcome here. Initial support sits at $464, with additional support available at the $360 level.
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While we make every effort to be free of errors in this report, it contains data obtained from other sources. We believe these sources to be reliable, but we cannot guarantee their accuracy. Investors who use options should read the Options Disclosure Document before making any particular investment decision. Officers or employees of this firm may now or in the future have a position in the stocks mentioned in this report. Dorsey, Wright is a Registered Investment Advisor with the U.S. Securities & Exchange Commission. Copies of Form ADV Part II are available upon request.
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Nasdaq Dorsey Wright is a registered investment advisory firm with more than 30 years of expertise is technical analysis, specifically focusing on the steadfast relationship between supply and demand in the markets. Our research and tools help our clients see through the day-to-day clutter of market movements while providing a clear understanding of where market strength lies at all times.
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