Your Social Security Number is Worth $4

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: News and stories about cyberattacks in the country and around the world are alarming. Imagine the negative impact these incidents will have on involved businesses, firms, organizations, individuals, etc. That’s terrible! That’s why a lot of cyber companies are leveling up their game to help different enterprises keep hackers at bay… and these companies are attracting lots of stock pickers from around the globe. However, as an independent investor, you have to be wary about investing in these kinds of stocks. Do you want to know why? Read on to know why you should exercise caution and wisdom in investing in some cyber companies. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Your Social Security Number is Worth $4 New stories of cyberattacks emerge every day... Earlier this week, Hillel Yaffe Medical Center in Israel was knocked offline by a ransomware attack for over a day... and it could have cost patients’ lives. There are even cyberattacks meant to poison people's drinking water by targeting a water treatment facility. That almost happened in Florida in February. For these reasons, U.S. Homeland Security is increasingly concerned about "killware" than ransomware. Cybersecurity is fast becoming an essential area for every government, company, and individual in the world to be aware of. The most startling part about cyberattacks isn't their ubiquity, though. It's how little these thieves appear to value the data that they're stealing. Things that we view as priceless, they price for pennies. It only costs $4 to buy someone's Social Security on the dark web, where hackers can buy and sell personal data. That means it's not just massive criminal syndicates who can afford to ruin someone's life. It's anyone who knows how to wander into a dark corner of the Internet. This has meant a heightened focus on investing in cybersecurity companies... There are companies on the front lines, employed by other companies and governments to protect their customers' or citizens' data. Palo Alto Networks (PANW) helps install firewalls to prevent hackers from accessing systems. Fortinet (FTNT) creates secured hardware to make it harder to penetrate through network switches, and monitors who can go in and out of networks. CrowdStrike (CRWD) offers software solutions to protect a company's cloud computing and essential workflows. And Rapid7 (RPD) provides dashboards that allow companies to monitor their system vulnerabilities and malicious behavior. With so much money being thrown around in cyberspace, investors naturally are excited to invest. They see that many companies will pay pretty much anything to keep hackers at bay… but just because a company is in high demand doesn't mean its stock will go higher. Many cyber companies are classic examples of that. Take Rapid7, for example. This company looks well-positioned since its products can act as a command center to defend against cyberthreats. Companies will want this, but the market may already know that is the case. By using our Embedded Expectations Analysis ("EEA") framework, we can get a good sense of exactly what the market is anticipating for Rapid7 over the next few years. Stock valuations are typically determined using a discounted cash flow ("DCF") model, which makes assumptions about the future and produces the "intrinsic value" of the stock. In the chart below, the dark blue bars represent Rapid7's historical corporate performance levels in terms of ROA. The light blue bars are Wall Street analysts' expectations for the next two years. Finally, the white bars are the market's expectations for how the company's ROA will shift over the next five years. Rapid7 just turned profitable in 2019 and 2020, as people started to adopt its software. However, the market is clearly getting ahead of itself. In the next five years, Rapid7 is priced for returns to explode from 6% in 2020 to almost 50% by 2025, which would be nearly impossible for any company, no matter how good the industry tailwinds. Those are staggeringly high expectations, and Wall Street analysts don't expect Rapid7's profitability to rise above its 2020 levels anytime soon. … and as with so many cybersecurity companies, investors are already pricing in a massive surge in demand. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn.     Stay tuned for next Wednesday’s The Independent Investor! Learn more about the first of the four steps to financial freedom on next week’s The Independent Investor!