Cyber security's clients

September 24, 2015 01:00 PM

Contemplating the growing threat of a cyber attack on Wall Street, brokers and exchanges, the first thing to look at is the main technology software and service providers. Most of those stocks can be found as holdings in the PureFunds ISE Cyber Security ETF (HACK). 

Plain and simple, the valuation of each of these firms makes a value guy blush. That is not surprising when you realize that HACK was at one time up 26% during a flat year like 2015. 

This article was going to be a scathing piece about how investment in the cyber security space was only for the criminally insane. Instead we are going to look at  some of that industry’s biggest customers: The investment outlook for the exchange sector, which may be susceptible to these crimes. As it turns out, that group is also one of our top ranked industries and is worthy of your consideration at this time. 

The key ingredient to becoming a top industry with our rating system is that the stocks in the group are receiving higher earnings estimates. Or simply put, earnings growth for the future is now believed to be better than thought in the past. This fundamental outlook improvement has always been a strong driver of new interest to a group of stocks. 

Now let’s review the two stocks in the group that Zacks currently has as “buy” rated. 

CME Group (CME): Earnings for the CME had been going in the wrong direction from 2012 through 2014. There were three painful earnings misses along the way that led to virtually no earnings growth over that stretch. Gladly, the last four earnings beats made it clear that business is finally on the upswing. In fact, one analyst said after their latest earnings beat that they were “firing on all cylinders.” These shares also boast a “Zacks Momentum Style Score of A,” which helps to improve the odds of future stock price outperformance. 

MarketAxess Holdings (MKTX): Its focus on bond trading has provided a much smoother ride to earnings growth and share price gains than CME Group. In fact, they have had only one earnings miss in the last 13 quarters. All the while, EPS has doubled over that span with shares doubling in price during the past year. MKTX is gaining market share, which is leading to ever more impressive profit margins and growth. That is a great recipe for investment success. 

Yes, the headlines are filled with stories of cyberattacks, which is what has pushed valuations in that group to unsustainable levels. Better to turn your focus to those groups where earnings prospects are still on the rise and valuations have not been so severely stretched. Right now that makes a much better case for these exchange stocks.

About the Author

Steve Reitmeister is the executive vice president at Zacks Investment Research at zacks.com. The cornerstone of the firm is the Zacks Rank stock rating system and its 26% average annual return since 1988. These results have been examined and attested to by the independent accounting firm Baker Tilley. @ZacksResearch