Cybersecurity Stock Breakout Has Traders Eyeing More Gains

(Bloomberg) -- Investors are betting that increased spending on digital defenses because of Russia's invasion of Ukraine will fuel further gains in cybersecurity stocks, despite trepidation about valuations that remain historically elevated.

After moving nearly in lockstep with the Nasdaq 100 Index in recent months, a gauge of cybersecurity-related stocks has surged ahead of the broader benchmark since the war began last week. Crowdstrike Holdings Inc. and Tenable Holdings Inc. are among seven stocks in the Nasdaq cybersecurity index that have gained 20% or more since then.

“Security fundamentals are rock solid and should outperform broader software due to rising threats, defensible budgets and more reasonable valuations,” Morgan Stanley analysts including Hamza Fodderwala wrote in a research note on Monday.

Even after the selloff over the last three months, cybersecurity stocks are by no means cheap, selling for 35.4 times estimated profits, in aggregate. In Bloomberg data going back to October 2017, the average price-earnings multiple is 30.6. The Nasdaq 100, by comparison, is priced at 23.6 times earnings.

Also, analysts for now aren't raising their earnings estimates because of the threat. Since Bloomberg News first reported on Nov. 12 U.S. warnings that Russia might be planning to invade Ukraine, 2022 predictions for Crowdstrike have gone up by 26%, but analysts have cut their predictions for Tenable, CyberArk and Mandiant Inc.

Still, the strength of the sector has been on display this week with the Nasdaq cybersecurity index advancing for a fifth-consecutive day on Wednesday. The 35-member index has gained 13% since Feb. 23, while the Nasdaq 100 is up 5.6%.

The economic sanctions imposed on Russia by the U.S. and its allies have made retaliatory cyberattacks inevitable and the threat will continue to benefit cybersecurity stocks, according to Truist analysts including Joel Fishbein Jr.

Bets that the economic ramifications of the war will force the Federal Reserve to take a more cautious approach to rate hikes has also provided a lift to other stocks with rapid growth outlooks. Cybersecurity, however, looks particularly attractive due to heavy demand for digital security services, according to Jeremy Schwartz, global chief investment officer at WisdomTree Investments Inc.

“Fears of accelerated cyber warfare caused a strong bid to these stocks, and we think the major selloff over the last six months and year-to-date represents a timely thematic opportunity for those looking to add more growth stocks to their portfolios,” Schwartz said in an interview.

Tech Chart of the Day

While the Nasdaq 100 has a well-deserved reputation as a benchmark for Big Tech, the index has plenty of stocks from other industries, and without them, this year's losses would be much bigger. Besides tech-adjacent industries like video games and mobile-phone carriers, the biggest positive contributors to the index in 2022 include ketchup producer Kraft Heinz Co. and drugmaker Vertex Pharmaceuticals Inc.

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