Ashley Madison and the Case for Cybersecurity Stocks

Amid Ashley Madison's security breach, traders may want to look at cybersecurity stocks like FireEye Inc (FEYE) and Palo Alto Networks Inc (PANW)

Jul 20, 2015 at 11:37 AM
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Cheaters around the world may be panicking today, after news broke that the affair-facilitating website has been hacked. Of course, this is just the latest in a series of recent online privacy invasions, but the nature of the information that the hackers -- known as "The Impact Team" -- are threatening to expose hits a little closer to home. The Impact Team, complaining that Ashley Madison's "full delete" feature fails to wipe personal info from the site, will reportedly release the data unless the website is pulled offline "permanently in all forms." Breaches like this are part of the reason cybersecurity stocks -- such as FireEye Inc (NASDAQ:FEYE) and Palo Alto Networks Inc (NYSE:PANW) -- have been all the rage.

While FEYE is down 1.8% this morning at $47.19 -- bucking the broad-market trend higher -- the stock has surged more than 49% year-to-date. Also, it appears the shares have found a foothold in the form of their 60-day moving average. A continued bounce from this trendline could put pressure on a number of skeptics. For starters, over half of the analysts tracking FEYE have assigned it a "hold" or worse rating, while 12.4% of its float is sold short. This could set the stage for future upgrades and/or short covering.

Likewise, options traders have bought to open puts over calls at an accelerated clip lately. FireEye Inc's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.58 ranks above 90% of comparable readings from the past year. A capitulation among these skeptics could add fuel to the stock's fire.

It's a similar set-up for PANW, which has spiked close to 140% year-over-year to trade at $190.21, helped by a recent bounce off its 40-day moving average. In fact, last Friday, the equity touched a record peak of $192.70. Yet, at the ISE, CBOE, and PHLX, traders have initiated long puts at a slightly faster rate than calls -- based on the 10-day put/call volume ratio of 1.04. This reading ranks in the 63rd annual percentile, as well, hinting at a moderately bearish bias among option players. Also, 6.3% of Palo Alto Networks Inc's float is sold short, so short-covering activity could be another catalyst higher.

Separately, it appears Microsoft Corporation (NASDAQ:MSFT) is looking to extend its reach in the cybersecurity space. Reports indicate the blue chip will purchase Israel-based start-up Adallom, which focuses on protecting corporate cloud data. Meanwhile, cybersecurity freshman Rapid7 Inc (NASDAQ:RPD) had an outstanding debut last week, but is now down 5.4% at $23.91.

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