Upside Potential With Cybersecurity Stocks

NEW YORK (TheStreet) -- The ever-changing world of cybersecurity seems to only receive much publicity after a huge database has been hacked and millions of account numbers have been stolen.

It makes our blood run cold to be reminded that our identity and our most personal financial information can be "served up" by those who know how to steal from trusted online sources.

I'm going on record right here and right now: This is an enormous investment opportunity that few analysts and even fewer investors seem to be excited about.

As a result, this will be the first of two articles that will explore this topic and "serve up" some potentially lucrative investment ideas. Yes, I'll be naming names and highlighting the companies that have, in my opinion, the best upside potential.

At the close of the latest federal income-tax reporting year we had yet another shocking example of how seriously we have the take this ongoing threat. A fraud of immense proportions was executed in cyberspace by a group of identity thieves who targeted the storage servers of none other than the Internal Revenue Service.

According to an article at Investment U a full-blown cyberscam has shocked taxpayers and apparently the Treasury department. The article reported the following details:

"The scammers electronically file a false tax return with an ill-gotten, legitimate Social Security number, filing before the actual taxpayer and claiming a refund. When the real taxpayer submits his return electronically, he is then notified the return cannot be filed because there has been another return already submitted with the same Social Security number."

If that doesn't make you cringe, read on.

"Scared yet? Sounds like a pretty intricate techno-savvy scheme, doesn't it? Guess again. The Social Security numbers are typically purchased from someone with legitimate access to valid numbers. There's little that's high-tech about it -- it's just your basic lack of integrity with personal information. Once a valid Social Security number and name are acquired, the e-filing is fairly straightforward."

It speaks to the need to even screen tax-filings using cybersecurity filters that may require special PINs and Usernames to protect us.

So the federal government, credit card companies, state governments, and hundreds of large financial services companies are going to need the latest, most sophisticated high-tech cybersecurity systems money can buy. It will create a bonanza of new revenue for the cybersecurity companies who fill these desperately needed orders.

Now you have a better understanding why Intel ( INTC) paid $7.7 billion for McAfee a couple of years ago. Intel wanted the proprietary cybersecurity products that McAfee sold, products like anti-virus software, firewalls, intrusion detection and prevention systems, anti-phishing and even application-specific firewall protection programs.

There are two companies on my cybersecurity "radar screen" I want to introduce you to. One is a small dividend payer that works primarily for the U.S. government. The second is a better-known, larger company whose security products target a much wider audience.

Man Tech International ( MANT) makes cyberproducts for national security programs, the Department of Defense, the intelligence agencies, State and Homeland Security, the Department of Justice, the FBI and NASA, just to name some of their federal government customers.

MANT is a relatively small company (the market cap is $898 million) with a current price-to-earnings (PE) ratio of only 7.78 and a forward PE ratio of 9. The trailing 12-month (TTM) price-to-sales (PS) ratio is also very low at 0.33. Its enterprise value-to-revenue ratio is also remarkably low at only 0.36.

MANT has revenue-per-share (TTM) of over $74, yet the price-per-share as of Friday closed at $24.31. Keep in mind that MANT's book value per share (most recent quarter) was $30.59. The chart below illustrates its one-year price movement, but notice the orange line symbolizing the trajectory of its book value per share growth. MANT Chart MANT data by YCharts

Its delectable 3.5% dividend is easily sustainable, as it represents a payout ratio of only 27%.

MANT is not without some flaws. Its operating and profit margins are an unimpressive 7.5% and 4.22% respectively. One reason for the stock being so far below its 52-week high of $38.19 registered last Oct. 27 invariably has something to do with cutbacks in spending by the federal departments that it sells to.

That may change soon, both because of the impact of the massive QE3 program launched by the Federal Reserve and the increasing threats to our national and personal security by cyberterrorists and identity thieves.

A recent article in the Washington Business Journal titled "Washington Leads Nation for Computer Science Jobs" names Man Tech as one of the top 15 computer science companies that are hiring. That certainly indicates a growth in anticipated government contracts (and the article mentions some other interesting possibilities).

At the very least, keep an eye on MANT, whose trading volume on Friday was nearly double its three-month average volume. It appears to be in an accumulation phase, especially by investors who also want reliable dividend income.

The other cybersecurity company I wanted to call to your attention is Symantec ( SYMC), which weighs in with a $13 billion market cap. SYMC provides security, storage, and systems management solutions to various organizations and consumers worldwide. Shares fell almost 2% on Friday on more than 40% higher than average daily volume.

Although SYMC doesn't pay a dividend, it has total cash of $4.11 billion, operating cash flow of $1.74 billion (TTM) and levered free cash flow of $1.38 billion (TTM). The operating and profit margins are impressive, coming in at 17% each as of June 29.

SYMC owns Norton security products, and when you look at Symantec's eye-opening Web site you may be able to tell why some analysts believe SYMC and its stellar lineup of products and services may be a takeover candidate.

Chief Financial Officer James Beer believes in the company enough to own more than 266,000 shares, as of June 1. More peculiar are the holdings of former CEO Enrique Salem, who was forced out of the company in July. He had declared as of May 12 that he owned nearly 578,000 shares. At Friday's closing price that's worth close to $10,710,300.

Symantec's one-year price per share history and revenue per share (TTM) is reflected in the following chart: SYMC Chart SYMC data by YCharts

These are just two of the companies in the cybersecurity space. In my next article I'll introduce you to at least two others. While there are hackers and cybercriminals in this world, the best of the cybersecurity companies will thrive and prosper.

As of the time of publication the author had no position in any of the companies mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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