Jeff Reeves’s Strength in Numbers: The cyberwars are coming — here’s how to prepare (and make money) http://ift.tt/2gdS805

The real threat to global markets is hacking and cyberterrorism.

Americans have once again been forced to debate the likelihood of World War III, thanks to the erratic behavior of a thin-skinned 71-year-old with a smartphone.

But for all the doomsday talk, U.S. stocks don’t seem to care much.

The S&P 500 Index

SPX, -0.09%

 continues to set new records like clockwork, and is sitting on a 14% return since Jan. 1.

And if you really want a sign that the market doesn’t care about global hostilities, consider that the iShares MSCI South Korea Index Fund

EWY, +0.64%

is up more than double the S&P 500 this year.

If there was really concern of escalating tensions with North Korea leading to military action, do you really think investors would be so eager to plow money into their neighbor to the south?

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Now, I’m no Pollyanna. There are indeed serious threats out there, and serious risks to global stability broadly and the American economy in particular.

In fact, one of the biggest threats we face right now actually comes from North Korea, but not in the form you might suspect.

The real threat to global markets is hacking and cyberterrorism.

Look at the Equifax breach that affected over 140 million Americans. Or look at the hacking over at Yahoo that compromised 3 billion user accounts and hundreds of millions of users. This is the real war we are fighting in 2017.

Recent reports indicate North Korea has a state-sponsored team of hackers. And while previous targets were “government agencies or media companies in countries it considered hostile … in the last few years, North Korean hackers seem to have become more interested in stealing cash.”

Case in point: the recent theft of $81 million from the Bangladesh central bank’s account, or a thwarted attempt to infiltrate the Polish banking system.

Missiles from North Korea pose a tangible threat and prompt visceral fears. But while less tangible, the risks posed by hackers is perhaps more likely to cause havoc for citizens, businesses and governments in the near future.

So what do we do about it?

Unfortunately, consumers are increasingly powerless. It’s the major gatekeepers of our information such as Equifax that get hacked at scale, not individuals being careless with passwords.

Equally disturbing is our political environment, where do-nothing Republicans have buried their heads in the sand about clear and decisive evidence that Russian hackers interfered with the 2016 election of their beloved Tweeter-in-Chief.

That leaves us with only one real solution: for-profit cybersecurity companies that are our protection against for-profit hackers.

As a result, there is a rapidly growing market for tech firms providing protection and peace of mind to businesses and governments. Worldwide spending on information security was about $75 billion in 2015, according to advisory group Gartner, and is expected to top $113 billion by 2020.

As investors, then, the opportunity is clear. Those who have a foothold in established and growing cybersecurity names will certainly see a good return on that investment as attacks are guaranteed to continue, and the market is guaranteed to grow.

If you’re interested in playing this trend, either as a hedge against the risk of a hacker-driven crisis or simply because of the short-term profit opportunity, here are three trades to consider:

Cybersecurity Play No. 1 — IBM

For those looking for a diversified way to play cybersecurity as part of the broader tech sector, IBM

IBM, +0.09%

is a good bet. It’s an entrenched stock that looks like a long-term value play, and its robust cybersecurity division gives it a way to tap into the upside of this focused trend.

Big Blue admittedly has its fingers in many pieces of enterprise tech, but cybersecurity is a core mission and not a pet project. Its IBM Security division serves 12,000 worldwide that monitor more than 35 billion “events” per day, according to its last annual report. It has a ton of patents and intellectual property and, of course, its flagship artificial-intelligence platform, Watson, is being deployed to predict attacks and take the fight to hackers when they pop up. This arm of its business is growing at a double-digit rate, and rakes in over $2 billion a year for IBM.

Yes, overall revenue is admittedly challenged as the company transitions away from old top-line drivers like enterprise mainframes into cloud-based services like artificial intelligence and security. But with a 4% dividend, a forward price-to-earnings ratio of less than 11 and one of the most entrenched businesses on the planet, this pick isn’t going anywhere. And if its cybersecurity arm pays off the way some think, it will power IBM back to the top of the tech sector.

Cybersecurity Play No. 2 — First Trust Nasdaq Cybersecurity ETF (CIBR)

If you want a pure-play on cybersecurity but have trouble picking individual stocks, then an ETF is your way to go. But while many investors are familiar with the TFMG Prime Cyber Security ETF

HACK, -0.31%

the first and largest fund dedicated solely to cybersecurity, there is a better alternative in the First Trust Nasdaq Cybersecurity ETF

CIBR, +0.09%

But while its peer may have more in assets under management, the lesser-known First Trust cybersecurity fund is superior in my view because of its underlying strategy. Simply put, CIBR is formulated to avoid many of the smaller and more risky plays in the industry. This is clear in the fact that CIBR requires a minimum market cap of $250 million vs. $100 million for HACK. And perhaps more importantly, CIBR looks for three-month trailing volume of $1 million with a minimum float of 20% while its competitor has no such liquidity demands.

At its core, this means CIBR is less likely to own smaller, up-and-coming companies. To me, this is a big plus, because I think it’s unlikely that this increasingly crowded corner of the tech market will allow for many more successful entrants. Rather, it seems more likely to me that the big players get bigger while the weak ones are forced out. CIBR ensures your portfolio is biased toward the winners.

Cybersecurity Play No. 3 — FireEye

If you really want to dive into individual names, then one-time momentum darling FireEye Inc.

FEYE, +0.06%

is the pick I like most.

FEYE has seen roughly 50% gains in 2017, more than triple that of the S&P 500, and it is looking to build on that impressive success in 2018 as it moves toward consistent profitability. And most importantly, a rather painful transition from big one-time charges to smaller and ritualized subscription fees appears to be working well; the company is riding a consistent string of narrower-than-expected losses, including a big report in August that powered FEYE stock 6% higher on a bright outlook.

Sure, it’s not the largest player with a $3 billion market cap. And, yes, the shares are still 70% below their 2014 peak after an overenthusiastic IPO fueled a bubble. But it’s the perfect Goldilocks cybersecurity play — not too big, not too small — for an investor looking to pick a single name. FireEye has many ways to deliver investors profits, either through continued improvement in its underlying business or an instant acquisition premium as one of the bigger players swoops in.