The uproar over Facebook Inc.’s (Nasdaq: FB) handling – or mishandling – of user data is just the latest in a string of incidents triggering anxieties about data security and privacy protection.
In fact, it’s estimated more than $90 billion will be spent on cybersecurity measures in 2018. According to Barron’s, that’s up 19% from 2017.
So we’ve got a data-security stock today that’s been helping to safeguard valuable assets since 1951 – one that is set for a 540% return in the next three years.
This was one of the first companies in the world to develop strategies to keep records and other valuables secure in the nuclear age.
Today, it’s trusted by 95% of the Fortune 1000 to safeguard their records, both physical and digital. That makes it a perfect pick-and-shovel play, as concern for data privacy and security is on the rise.
Between its dividend, its financial growth, and its undervalued share price, this stock could be the prime beneficiary of public scrutiny of the way corporations handle information.
The Rising Urgency of Data Security Is Driving Industry Growth
That concern for privacy has been around since long before the digital age. But the scale of today’s problem is unlike anything we’ve ever seen:
- The private information of 143 million people was compromised in the Equifax Inc. (NYSE: EFX) breach last year, including 200,000 records containing credit card information.
- In 2014, a cyberattack exposed the names, addresses, birthdates, and passwords of 145 million eBay Inc. (Nasdaq: EBAY) users.
- And we now know that a hack on Yahoo! – now Altaba Inc. (Nasdaq: AABA) – that year compromised the data of all 3 billion of its users.
In the case of Facebook, which has 2.2 billion users, there wasn’t even a breach. The problem is how the company exposes data to third parties without being hacked.
That set off a wave of demand for tighter data security.
The European Union passed a law in May restricting how companies can collect and handle data from citizens of the EU’s 28 member countries.
The law applies no matter where the data is processed, which means even American companies have to fall in line if they cater to European users.
Along with this change, Money Morning Chief Investment Strategist Keith Fitz-Gerald sees the tech world starting to shift away from stocks like Facebook and Twitter Inc. (NYSE: TWTR) and toward companies based on corporate data and security.
That might have happened even without Facebook’s high-profile scandal. According to researchers at Cybersecurity Ventures, worldwide cybersecurity spending grew from $3.5 billion in 2004 to an estimated $120 billion in 2017 – a 34-fold increase.
That growth will continue as the price tag of faulty security continues to rise. Cybercrime is expected to cost the world $6 billion annually by 2021. That’s a 100% increase since 2015.
That’s more than the sale of all the illegal drugs in the world combined.
As nearly every aspect of data and record-keeping moves into the digital realm, the scale of the potential damage only goes up.
The cybersecurity industry provides must-have products and services to combat this phenomenon. And it’s only becoming more critical with time.
That’s why Money Morning Defense and Tech Specialist Michael A. Robinson says cybersecurity is a “target-rich market that’s going to make a lot of companies – and their investors – rich. Very rich.”
In other words, this sector is a must-have in your portfolio.
One Easy Way to Profit from the Trend
Before we get to our top pick in the industry, it’s worth highlighting the easiest way to get broad exposure to dozens of the top cybersecurity firms in the world.
That’s the ETFMG Prime Cybersecurity ETF (NYSE Arca: HACK).
This ETF gives you a healthy mix of large, well-established companies and young startups that are ready to take off. For more risk-averse investors, this is an ideal mix – though it will limit your upside.
The 47 companies in this ETF include big names you’ve already heard of, such as Cisco Systems Inc. (Nasdaq: CSCO) and Symantec Corp. (Nasdaq: SYMC).
But it also includes smaller companies with breakout potential, such as…
- Splunk Inc. (Nasdaq: SPLK), a San Francisco–based company that specializes in protecting machine-generated data – making it a play not only in cybersecurity but on the rise of Big Data. Splunk was founded in 2003 and has rapidly grown to more than $1 billion in annual revenue and a $17 billion market cap.
- Qualys Inc. (Nasdaq: QLYS), which runs a cloud-based security platform that integrates with all of the major cloud providers. The platform provides an unblinking assessment of a network’s security, with two-second global visibility and a minimal footprint. QLYS is up 215% in the last two years.
- FireEye Inc. (Nasdaq: FEYE), which has led investigations into attacks on Target, JP Morgan Chase & Co., Sony Pictures, and Anthem. According to Deloitte, it is the fastest-growing firm in cyber security. FireEye’s earnings are only just now reaching positive territory, but EPS is forecasted to grow from $0.02 this year to $0.58 by 2021. This company is now hitting its stride.
Over the last six months, HACK has crushed the market, gaining 24.4%. That’s more than five times the return of the S&P 500, which is only up 4.6% in that time.
“HACK gives us a great diversified play on a very hot trend,” Michael Robinson says, “that should continue to crush the overall market for years to come.”
As good a play as that is, we’ve got an even better pick in this space – one that you won’t find among HACK’s components.
This is a company that practically wrote the book on keeping records secure, which is why it’s trusted by more than 230,000 organizations on five continents…
After 67 Years Protecting the World’s Information, This Company Is Still the Best of the Best
Iron Mountain Inc. (NYSE: IRM) got its name from a depleted iron ore mine in the Hudson River Valley, which founder Herman Knaust first used successfully to grow mushrooms.
By 1951, the economic and political landscape was shifting, and Knaust decided to use Iron Mountain to plant not spores or seeds but a series of vaults. He opened an office in Manhattan and took on clients such as East River Savings Bank and stored copies of deposit records and signature cards in the mountain vaults.
Data security was extremely personal to Knaust. He had sponsored many Jewish immigrants relocating to the United States after their personal records had been destroyed in the war. Now he wanted customers to feel secure knowing that their information was protected even if a worst-case scenario – especially in light of the growing nuclear threat – were to become a reality.
Today, Iron Mountain protects organizations’ mission-critical data with a real estate network of more than 1,400 facilities in over 50 countries, covering upwards of 85 million square feet in total.
Its name is so trustworthy that its customers include 95% of the Fortune 1000 (a group that, by the way, includes Iron Mountain).
It also stores unique valuables such as the wills of Princess Diana, Charles Dickens, and Charles Darwin, and the master recording collections of Frank Sinatra and Prince.
Iron Mountain customers are incredibly loyal, too: 25% of its storage from 22 years ago is still in the same place today.
But the company has not stood pat on its existing footprint. It’s been making strategic acquisitions to expand its global reach. That includes data centers in London and Singapore acquired from Credit Suisse in 2017 and acquisitions of data center companies Fortrust, IO Data Centers, and EvoSwitch in the last year.
A particular focus for Iron Mountain has been on high-growth emerging markets. Revenue from emerging markets accounted for 18% of the company’s total in 2017, almost double its share from four years earlier. Those markets were the driving force behind the company’s 47 million cubic feet worth of new records storage space created in 2017.
Iron Mountain has developed customized solutions for 11 different types of organizations, including banks, energy firms, government agencies, and the life-sciences sector. The company offers an array of records-related services such as inventory management, document imaging, and secure-records destruction.
This month, IRM launched “Iron Cloud,” which provides critical protection and recovery in the event of an attack. Iron Cloud will recover data and perform a meticulous data audit to ensure complete eradication of any ransomware that might be lurking in the system.
The stock is also a real estate investment trust, distributing most of its profits to shareholders through dividends. Right now that gives you a 6.8% annual return baked in from the moment you buy your shares.
And this dividend powerhouse is due for a sharp rise in share price to boot.
Crunching the Numbers: Six-Fold Return on the Way
Even in a high-dividend industry, that 6.8% yield is 60% higher than average.
The first concern with such a high yield would be whether it’s sustainable. But that dividend represents only 82.7% of the company’s adjusted funds from operations (AFFO) per share, suggesting that it should have little difficulty maintaining or growing that payout in the coming years.
That in itself is a very good reason to grab IRM now. As the stock rises in share price, you can keep adding that return from the dividend on top of your gains.
IRM’s funds from operations (FFO), for example, were up 36% in 2017 from the year before. If the stock price keeps up with that rate of return, you could end up with 100% gains in just two years.
But if you got in now with the yield where it is, you could add another 13.6% on top of that.
That’s before you factor in that IRM’s dividend has more than doubled since 2014. It could rise considerably over the next few years as IRM expands in emerging markets.
The yield and its AFFO ratio already tell us that this stock is undervalued. But it’s hard to say how much until we look at the stock’s price-to-FFO ratio of 11.0 over the last 12 months. That means this stock could rise 150% before it’s even at fair value.
Add up all these factors – the FFO growth rate, the dividend growth rate, and the discount on IRM’s fair value – and you get 540% return over just three years.
And actually, that could be an underestimate.
Look again at the chart for HACK above, and see how the whole cybersecurity sector has taken off in the months since the story on Facebook’s privacy policies has been making headlines.
The world is changing. People are demanding that companies put a higher priority on privacy and security. And those companies are listening.
Iron Mountain’s founder saw this problem 70 years ago. This is the company that the corporate and institutional world has trusted for generations. Now, with a brighter spotlight on the issue, Iron Mountain will be where organizations turn to tighten up their data handling.
Now’s the time to claim your share of it.
— Stephen Mack
Source: Money Morning