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3 Security Stocks to Watch in a Challenging Industry

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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 - Free Report) , Qualys (QLYS - Free Report) and FireEye (FEYE - Free Report) are gaining from these trends amid the disruptions caused by the coronavirus pandemic.

Nevertheless, a soft spending on information security by organizations is expected to hurt the industry in the near term. Gartner has lowered its 2020 year-over-year growth forecast for the worldwide spending on information security and risk management technology and services to 2.4% from the 8.7% projected earlier.

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 the 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 Delays Mar Prospects: The coronavirus mayhem will likely hurt the industry in the near term as organizations are pushing back their investments in big and expensive technology products due to the global economic slowdown concerns. According to a report by Gartner, the worldwide IT spending is anticipated to be $3.5 trillion in 2020, marking a decrease of 7.3% from 2019.

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 Dull Prospects

The Zacks Security industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #196, which places it among the bottom 23% 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 solid 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 the market. But before we present the top industry picks, it is worth taking 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 as well as the S&P 500 composite over the past year.

The industry has gained 15.9% during this period compared with the S&P 500’s 20.3% rally and the broader sector’s 43.9% 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 8.83X, higher than the S&P 500’s 4.67X and the sector’s 5.54X.

Over the last five years, the industry has traded as high as 9.33X, as low as 5.65X and recorded a median of 7.50X, 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 #2 (Buy) 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 cyber-attacks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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 2020 earnings has moved 7.6% north to $2.84 per share over the past 60 days. Qualys’ shares have been up 13.1%, year to date.

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 (Hold) company has been gaining from the heightening cyber-attack risks that are propelling demand for its FortiMail platform.

This Sunnyvale, CA-based stock has gained 23.3% in the year-to-date period. The consensus mark for its current-year earnings has moved 21 cents north to $3.25 per share in 60 days’ time.

Price and Consensus: FTNT

FireEye: The company is currently focusing on cloud-based protection services. Earlier this year, it unveiled FireEye Messaging Security, which protects collaboration tools like Microsoft Teams and Slack. This solution is designed to reduce risks of cyber-infiltrations by scanning objects and links shared in the collaboration tool to identify zero-day malware and phishing links in real time.

In addition, FireEye has added the User and Entity Behavior Analytics (UEBA) tool to its Helix platform. The tool uses machine learning to set a baseline behavior and monitors any deviation from it. This helps the firm identify risky entities and protect organizations from security threats.

This Zacks Rank #3 stock has lost 6.1% in the year so far. The consensus mark for the ongoing year’s earnings has been revised 16% upward to 29 per share in the past 60 days.

Price and Consensus: FEYE

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Fortinet, Inc. (FTNT) - free report >>

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