Count cybersecurity stocks and exchange traded funds among the technology assets that are slumping this year.
The First Trust Nasdaq Cybersecurity ETF (CIBR), which tracks the Nasdaq CTA Cybersecurity Index, is off 26% year-to-date. However, with cybersecurity equities as relevant as ever, perhaps more so, a case can be made that the punishment endured by the group is too severe. At the very least, some CIBR components are now trading at attractive valuations.
“Heightened geopolitical tensions, high-profile ransomware attacks, and the growth of working from home have all reinforced the need for a multifaceted approach to cybersecurity protection. For long-term investors, the bear market is providing opportunities to pick up some of these names at their most attractive valuations in years,” noted Morningstar analyst Dave Sekera.
The $4.85 billion CIBR holds 38 stocks ranging in weights of 0.06% to 6.72%. Some of the ETF’s largest holdings are among the most undervalued cybersecurity equities today, potentially adding to the long-term allure of the fund.
Additionally, it could pay to remember that CIBR and its holdings fared pretty well to start 2022, and the reasons for recent selling pressure in the cybersecurity group may not be a direct commentary on these stocks.
“Considering how well these stocks had held up prior to the recent selloff into bear-market territory, we think many portfolio managers had switched to selling what they could as opposed to what they wanted to. In our view, this has provided investors with an opportunity to invest in a high-growth industry whose clients will be unwilling to cut back on their services even in periods of economic uncertainty and/or high inflation,” added Sekera.
Among the CIBR components Morningstar sees as undervalued at this time are CrowdStrike Holdings (NASDAQ:CRWD), Fortinet (NASDAQ:FTNT), Okta (NASDAQ:OKTA), Palo Alto Networks (NASDAQ:PANW), and Zscaler (ZS). CrowdStrike, Palo Alto Networks, and Zscaler are CIBR’s largest, third-, and fourth-largest holdings, respectively.
“CrowdStrike provides endpoint detection and response, which constantly updates security software measures via crowdsourcing. In addition, CrowdStrike also has a leading incident response and remediation service that in turn leads to new client sales of products and services,” said Sekera. “With a dearth of cybersecurity talent available in the marketplace, organizations are finding CrowdStrike’s managed services to be a solution to stay ahead of threats. We forecast that revenue will grow by over 30% per year over the next few years, much faster than the overall industry.”
The quintet of aforementioned stocks combines for about a quarter of CIBR’s roster.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.