You probably heard about the cyberattack on MGM Resorts International (MGM). It’s been all over the news.
Hackers disrupted MGM’s system – hotel keycards didn’t work; slot machines were blank; ATMs stopped spitting out cash. And they demanded a sizable ransom to end the attack.
It wasn’t so much a direct “theft” as it was a kind of “digital kidnapping.”
This story really hit home.
It reminded me – yet again – of my own brushes with cyberattacks and theft.
In fact, just a couple of weeks ago, some digital miscreant tried to hack my email and swipe a hefty chunk of change from a wire transfer I was handling for one of my businesses.
Fortunately, we caught it on time and stopped the theft attempt in its digital tracks, but I don’t mind saying it was a scary couple of hours before we were certain the threat was thwarted and everything was sorted out.
This wasn’t the first time I’ve dealt with such a threat. I know it won’t be the last. And it’s a reminder that we, as investors, must expand our definitions of “risk” and must boost our protections against loss.
Just last week, word came down that fellow casino stalwart Caesars Entertainment (CZR) had been hit. The hackers absconded with key data of loyalty program members, including Social Security numbers and driver’s license numbers.
The Wall Street Journal reported that Caesar’s paid $15 million to the hackers to prevent the data from being released. And that payoff was only half what the hackers had initially demanded.
You folks are seeing what I’m seeing. And I know you’re worried. In a recent note to me, Quantum Edge Pro reader Jack asked:
In your discussions about quantum computing, you have not mentioned the downside that I am MOST fearful of: namely, how will any of our data or funds ever be safe and secure when nefarious people can just use them to hack our passwords and steal our money?
Well, Jack, I have bad news, good news – and better news.
First the bad: Odds are it won’t happen to you, but there’s no foolproof way to lock down your money and fence off your accounts to guarantee you won’t be hacked. Not yet, anyway.
Now the good: Innovation provides hope for the future. As artificial intelligence, quantum computing, and other breakthroughs evolve and grow, so, too, will the ancillary technologies businesses that support it. Like cybersecurity.
Global spending on cybersecurity is expected to be $219 billion this year… and grow 37% to nearly $300 billion in 2026, according to research firm International Data Corporation (IDC).
Banks write off $2 billion every year due to theft. Fortunately for us, they “cover” most of the costs out of their own pockets. And that incentivizes banks – and all companies – to more-effective solutions.
So what’s the better news?
The companies leading this charge are just the kind of innovators I have in mind. We can hitch a ride – and profit – as these players battle the digital demons.
Three in particular are worth a careful look.
My Favorite of the Big 3
The largest cybersecurity companies by market capitalization are:
- Palo Alto Networks (PANW) – $70.7 billion
- Fortinet (FTNT) – $46.2 billion
- CrowdStrike (CRWD) – $39.1 billion
PANW and CRWD have had particularly good years, up around 60% each, while FTNT has lagged after getting hit following its last earnings report.
Fortinet beat on the bottom line, while revenue fell slightly short of revenue expectations. But the rate of growth slowed and management’s outlook for the current quarter was below expectations.
Full disclosure: I own FTNT in my personal accounts. But I see this latest pullback as a buying opportunity for long-term investors.
Why? Multiple reasons, but I would say the two most significant are fundamental strength and valuation.
Of those three largest companies Fortinet’s fundamentals rate the highest by far in my M.A.P. system that I use at my research firm and in my Quantum Edge Services. Its Fundamental Score is a robust 83.4, which is significantly higher than Palo Alto’s 62.5 and blows away CrowdStrike’s 45.8.
And by the way, that score includes the latest earnings disappointment. So there’s no question which business is the strongest right now.
Debt is one of the big differentiators, especially in these times of high interest rates when it costs more to service debt. Fortinet has no debt, in sharp contrast to Palo’s high debt at 130% of equity and CrowdStrike’s 53.5% of equity.
And valuation is also a huge factor at the moment. FTNT trades at 39 times expected earnings, which is much more attractive than PANW’s forward PE of 42.6X and CRWD’s even higher valuation at 53.5X.
I would also highlight another cool and highly predictive feature of my quantitative M.A.P. system. Every day, it ranks the Top 20 stocks in the market – a feature that hedge funds and institutions pay a lot of money for. Stocks that appear repeatedly on that Top 20 list become what I call “outliers” – the true best of the best that have performed well in the past and are likely to continue performing well in the future.
Fortinet easily qualifies as an outlier. It has appeared on my Top 20 list 78 times in the last nine years. That compares to just three appearances for Palo Alto and a single blip for CrowdStrike.
FTNT debuted in my Top 20 list way back in 2010, and has soared 2,771.5% since its first appearance.
After Fortinet’s sharp pullback in August, its Technical Score is the weakest of the three stocks at 61.8, which is well below PANW and CRWD at 88.2.
And when you pull everything together – fundamentals, technicals, and Big Money inflows – my system generates a Quantum Score for more than 6,000 stocks. All three of these stocks score in the 70s, with FTNT and CRWD at 70.7 and PANW at 77.6.
On a topline reading, they all fall into the optimum buy zone of 70 to 90. But in this case, Fortinet’s fortress-like fundamentals give it the higher probability for long-term profits.
I will say that some smaller companies look even more appealing right now with broader strength across all three critical categories. I have a few on my watchlist right now with an eye toward adding one to my Quantum Edge Pro service, where we focus on more midsize companies with bigger upside potential. You might want to look into some of those as well.
Enjoy the rest of the weekend, and I’ll talk to you on Monday.
Jason Bodner’s Power Trends