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3 Security Stocks to Keep an Eye on in a Challenging Industry

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·7 min read
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  • QLYS
  • CHKP
  • ^GSPC

The Zacks Security industry is benefiting from solid demand for cybersecurity offerings as well as the heightening need for secure networks and cloud-based applications amid the current remote-working and online learning wave. Industry participants like Fortinet (FTNT), Qualys (QLYS) and Check Point Software Technologies (CHKP) are gaining from these trends amid the disruptions caused by the coronavirus pandemic.

Moreover, the spending on information security by organizations is slowly recovering and expected to aid the industry in the near term. Per Canalys, as reported by Infosecurity Magazine, the worldwide cybersecurity market is projected to jump up to 10% year on year in 2021 to reach $60 billion, as the global economy slowly recovers from the pandemic.

However, the gradual recovery in the global economy is coming with rising interest rates, which are leading to technology stock sell-offs. This, in turn, is creating a pullback in the security industry as well.

However, players such as Fortinet, Qualys and Check Point are expected to overcome this challenge and strengthen their positions in the security industry.

Industry Description

The Zacks Security industry comprises companies offering on-premise and cloud-based security solutions. These can be used for identity access management, infrastructure protection, integrated risk management, malware analysis and Internet traffic management, to name a few.

Industry participants offer different types of security solutions, most of which can be used interchangeably. These solutions can be roughly categorized into the following types:

Computer Security: These solutions provide protection from vulnerabilities in both software and hardware of a computer system. A computer can get infected via non-web things like USB cables, which can consequently affect the LAN and other systems, damaging important files.

Cybersecurity: This umbrella term includes sections like web security, network security, application security, container security and information security.

Information Security: This is concerned with any form of data-security issue, be it physical data (included under computer security) or digital data (considered part of cybersecurity). Physical data-security issues can be present in non-computer devices, such as telephones.

3 Trends Shaping the Future of the Security Industry

Tech Spending Recovery Brightens Prospects: The coronavirus mayhem had hurt the industry as organizations were pushing back their investments in big and expensive technology products due to the global economic slowdown concerns. However, with the global economy slowly recovering from the crisis, IT spending by enterprises is also gaining traction. According to a report by Gartner, worldwide IT spending is anticipated to be $3.9 trillion in 2021, increasing 6.2% from 2020.

Cloud Migration Hurting On-Premise Security Demand: Traditional spending on on-premise information security hardware and software is weakening amid the COVID-19 pandemic-led remote-working wave and accelerated cloud migrations for digital transformation.

Rising Cyber Threats Boost Demand for IT Security: Frequent cyberattacks are spurring demand for security solutions. This worrisome trend has not only affected certain companies but also threatened the national security of some countries. Notably, the current global health crisis has given rise to newer forms of hacking and cybercrimes, which are difficult for firms and individuals to grapple with. Firms operating in the security industry are working hard to address these concerns. Hence, these companies are positioned to benefit, as protection against spear phishing, credential-based attack, account takeover and ransomware attacks, among others, has become the need of the hour.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #210, which places it among the bottom 17% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Despite the gloomy industry outlook, few stocks are worth watching in the market. But before we present the top industry picks, let’s take a look at the industry’s shareholder returns and current valuation first.

Industry Lags on Shareholder Returns

The Zacks Security industry has lagged the broader Zacks Computer and Technology sector but outperformed the S&P 500 composite over the past year.

The industry has gained 62% during this period compared with the S&P 500’s 56% rally and the broader sector’s 77.5% appreciation.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the trailing price-to-sales ratio (P/S), which is a commonly used multiple for valuing the Security stocks, the industry is currently trading at 10.34X, higher than the S&P 500’s 5.38X and the sector’s 6.21X.

Over the last five years, the industry has traded as high as 10.43X, as low as 5.56X and recorded a median of 7.54X, as the charts below show.

Price-to-Sales Ratio (TTM)

Price-to-Sales Ratio (TTM)

3 Stocks to Watch Out For

Qualys: This Zacks Rank #3 (Hold) company offers cloud security and compliance solutions that enable organizations to identify security risks to their information technology infrastructures, thus helping protect their IT systems and applications from cyberattacks.

Qualys is benefiting from the surging demand for security and networking products amid the coronavirus crisis, as a huge global workforce is working remotely. Accelerated digital transformations by organizations are also fueling demand for the company’s cloud-based security solutions.

The Zacks Consensus Estimate for 2021 earnings has remained steady at $2.66 per share over the past 30 days. Qualys’ shares have lost 12.6% year to date.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: QLYS

Fortinet: The company is benefiting from dominance in the Unified Threat Management (UTM) space, which is one of the fastest evolving segments in the network security space. Moreover, this Zacks Rank #3 company has been gaining from the heightening cyberattack risks that are propelling demand for its FortiMail platform.

This Sunnyvale, CA-based stock has gained 38.8% in the year-to-date period. The consensus mark for its current-year earnings has remained steady at $3.69 per share in the past 30 days.

Price and Consensus: FTNT

Check Point: Headquartered in Tel Aviv, Israel, Check Point Software Technologies Ltd. has evolved into a well-known provider of information technology (IT) security solutions across the world.

The company offers a comprehensive range of software and combined hardware and software products aimed at IT security. Attached either to an operating system, a computer device, a server or a virtual desktop, the solutions cover network and gateway security, data security and management needs.

This Zacks Rank #3 stock has lost 10.4% in the year so far. The consensus mark for the ongoing year’s earnings has been unchanged at $6.69 per share in the past 60 days.

Price and Consensus: CHKP

+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities

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