Figures released by the UKs Office forNational Statistics suggest one in 10 of us have been victims of cybercrime in the past year. In 2015/16, a staggering 5.8m incidents of online fraud and virus attackswere reported, far more than previously estimated(3.8m).
But were not the only ones at risk. Just a few days ago,the Greater London Authority Conservatives estimated that cybercrime costs businesses35bn a year in the capital alone. Recent high profile hacks involving accounting software developer Sage and broadband provider TalkTalkappear to highlighthowsome companiesare still lagging farbehindothers when it comes to protecting their staff, customers and ultimately, their profit margins.
Based on theabove, we can be fairly sure that the need for improved security measures willgrow exponentially for years,making it an attractive,long-term investmentproposition. Here are some companies that may be worth investigating further.
Key players
Manchester-based NCC (LSE: NCC) is one of the leaders in thefight against cybercrime and a star player with consistent year-on-year revenue and earnings per share growth allowing forregular double-digit increases to the dividend (although admittedly, the yield remains small at 1.4%).
Unfortunately for prospective investors, quality rarely comes cheap. On a forecast price-to-earnings (P/E) ratio of just under 25, it will cost to add NCC to your portfolio. Then again, given its growthpotential, this valuation could still be regarded as reasonable.
Despite having produced anti-virus software and encryption products for the last 30 years,Sophos (LSE: SOPH)is a relatively new arrival on the stock market. Its likely to be an immediate beneficiary of more and more medium-sized businesses building their online presenceand requiring increased security.Since listinga year ago, shares have dipped to a low of175pfollowing higher operating losses being reported compared to the previous year. Having rebounded to 255p today, investors will be looking for better numberswhen the company releases interim results in November.
Perhaps one of the less obvious choices for riding this theme is 18bn cap BAE Systems (LSE: BAE). The companymay be best known for building submarines and aircraft but it also has a rapidly growing cybersecurity division. Despite performing well since the EU referendum result (with its share price rising from 480p on 24 June to 550p today), BAE remains on a fairly attractive forecast P/E of just over 13. A well covered (for now) dividend yield of 3.8% shouldalso appeal toincome investors. Nevertheless, those interested in the company may wish to dig further given its massive pension deficit and the recent disposal of its shares by star fund manager Neil Woodford.
If in doubt, diversify
To mitigate company-specific risk, you could buy shares inall of the above. However, theres a simpler, more cost-effective solution.
Yesterday, I commented on the many attractions of exchange traded funds, particularly for those just starting out in investment. Thanks to a surge in interest, the UK now has its first fundin this area, offered byETF Securities (LSE: ISPY). Although the annual fee isrelatively high (0.75%) when compared to one tracking the FTSE 100, this may be a price worth paying given the diversification on offer, lack of alternatives and the possibility ofsmaller constituents becoming takeover targets, thus providing even better returns for risk-tolerant investors.
Look to the future
The threat of cybercrime won’t just go away. As such, demand for increased security is setto explode in the coming years as more businesses and individualsfall victim to highly sophisticated hackers.
Spotting a growingtrend or promising company before other investors do can supercharge your returns. That said, looking far enough into the future isn’t easy, especially given our overwhelmingly human tendency to focus onjust the next few days, weeks or months in the market. If we can counter this and other common errors, we’re more likely to reap the benefits that can come from investing.
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Paul Summers owns shares in ETFS ISECyber Security GO UCITS ETF. The Motley Fool UK owns shares of NCC. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
