As cybersecurity stocks keep climbing, they continue to represent one of the best plays in the market that hedge funds have so far missed.
Investors got a reminder of this on Thursday when shares of Palo Alto Networks surged another 4 percent, to $167.55, after the company reported fiscal third-quarter results that beat consensus estimates.
The stock has now advanced more than fourfold since mid-November 2013 alone, climbing a steady upward path with few downdrafts.
Thursday morning, Stifel Nicolaus raised its price target from $165 to $180, noting that the company beat investor expectations “across all key metrics” and “delivered another quarter of margin expansion.”
Credit Suisse raised its price target from $165 to $190. “Palo Alto’s results reinforce our thesis that the company is positioned to continue to gain market share given the many unique advantages of its next-generation firewall platform,” it said in a note sent to clients Thursday morning.
And Deutsche Bank raised its price target on Palo Alto from $170 to $200.
Palo Alto is among a number of cybersecurity stocks that make up one of the hottest sectors in the stock market. Many of these stocks have doubled and tripled amid global concerns of growing threats to government, corporate and personal computer systems.
Palo Alto is known for its next generation firewall, the Palo Alto Networks Threat Intelligence Cloud, which maximizes the sharing of threat intelligence, and Advanced Endpoint Protection for devices such as cell phones, tablets and cash registers.
Yet one is hard-pressed to find any meaningful hedge fund presence in these stocks. This is surprising given the large number of long-short managers — especially among the Tiger Cubs and Seeds — who routinely invest in technology and Internet companies.
In fact, one is hard-pressed to find a hedge fund among Palo Alto’s top 25 holders.
Way down the list you finally find Daniel Benton’s Andor Capital Management, which took an initial stake of 250,000 shares in the first quarter, making Palo Alto the firm’s eighth-largest holding. However, keep in mind that Andor’s two largest holdings alone combined for nearly 40 percent of his assets and his top seven holdings account for roughly two-thirds of assets.
The stock is also not a significant holding among other hedge funds. The same held true in previous quarters. Their loss.
Another example is Fortinet, which rose 1.9 percent on Thursday. Fortinet is up about 75 percent since October and 150 percent since November 2013.
Its FortiGate products provide a wide array of functions, including a firewall, a virtual private network, antivirus software, intrusion prevention, web filtering and antispam functions, among others, while its FortiManager allows businesses to manage FortiGate products.
The largest hedge fund investor in Fortinet is Kenneth Griffin’s Chicago-based Citadel, the 12th-largest shareholder. However, it trimmed its position by about 18 percent in the first quarter, and the stock now ranks a mere No. 185 in the multistrategy giant’s U.S. stock portfolio.
Meanwhile, Ricky Sandler’s New York–based Eminence Capital dumped its entire Fortinet stake of more than 1.57 million shares last quarter, and Jericho Capital Asset Management sold its roughly 1 million–share position.
FireEye is another cybersecurity stock bypassed by hedge funds. This stock, however, has been more volatile than its competitors.
The stock surged more than 4 percent on Thursday to $46.82. This is roughly half the stock’s price in early March 2014, when investors grew worried that it was burning through its cash. The company has never made money since its initial public offering in September 2013 and has seen losses going back to at least 2009.
However, since bottoming, the stock has surged about 75 percent. And this week it raised $800 million in a convertible securities offering.
Yet at the end of the first quarter, just one hedge fund firm ranked among FireEye’s top 25 investors — JAT Capital Management, which took an initial stake of more than 1.7 million shares, making it the ninth-largest holder of its shares. JAT, however, recently announced it was shutting down its funds.
James Simons’ East Setauket, New York–based Renaissance Technologies did take an initial stake of more than 1.17 million shares, but FireEye ranked only No. 245 among its holdings. Given its rapid trading strategy, Renaissance could be out of the stock already.
Check Point Software Technologies, which rose 1.61 percent on Thursday, is up nearly 30 percent since October and has nearly doubled since June 2013. The company is one of the oldest, largest and most profitable among the bunch. Last December, Paul Wick, who since 2001 has run the Seligman Tech Spectrum Fund, a long-short technology fund, called Check Point “one of the most profitable companies in the world.”
Yet this stock is also devoid of hedge fund investors. And only a handful have been buying in the past few quarters, and generally in small amounts.
For example, Citadel was the largest buyer in the fourth quarter, picking up 1.8 million shares. Even so, the stock ranked just No. 100 in its U.S. equity portfolio.
Perhaps hedge funds need a breach of their own computer systems to discover this industry.
