By Tom Burnett CFA
Many investors are looking for individual names or stocks to participate in a particular investment theme. For example, the adverse ransomware attacks on large companies or enterprises has led to a focus on companies that can prevent or minimize cyber attacks. One way to find individual companies that focus on a specific area like cyber security is to look inside an ETF for names of single entities that provide the sought after service. The Global X Cybersecurity ETF -symbol BUG-provides an excellent example.
Using Yahoo Finance functions with April 5, 2022 prices, an investor is able to build a comparative spreadsheet that will identify specific companies engaged in the cybersecurity space. Looking at the top eight holdings inside the ETF, the investigating investor finds the following companies: CHKP, PANW, FTNT, NLOK, TENB, ZS, OKTA and CRWD. Using the Yahoo Finance Statistics pages, the investor can rank these companies by market cap, enterprise value (market cap plus net debt), and 52-week price change (along with the price change in the S/P 500 Index over that same period). These companies range in size of market cap from $6.3 billion (TENB) to $60.7 billion (PANW). The ratio of Enterprise Value to Revenue can then be used to see which companies are selling at the most or least expensive multiples of revenue. For example, NLOK sells for an EV-Revenue multiple of 6.5x compared to ZS which sells for more than 39 times revenue. Looking at the stock price changes, we see that the PANW stock price has risen over 86% during the past year, compared to 12.4% increase in the S/P 500 Index. Only one of the eight stocks is down over the past year, OKTA (off 29.8%) as the group has clearly benefited from the market’s concern with hacking and cybersecurity.
By using this comparative analysis feature, an investor is now able to see which stocks in the focused industry are selling cheap or expensive to each other. A contrarian investor may choose to look more closely at the stocks whose prices have not increased already during the past 52 weeks. The individual hunt for ‘needles’ will vary by investor, but looking inside the ‘haystack’ can provide the tools for individual stock selection once an industry has been identified. Almost every major industry now has an ETF product offering which provides investors the opportunity to look deeply inside the ‘haystack’ to see if any individual ‘needles’ can be discovered.
Tom Burnett CFA is Director of Research