4 Stocks Helping The Now-Famous HACK ETF

Cyber security – a need of the hour – has developed into a booming industry on growing awareness due to widespread hacking. With the extensive adoption of Internet usage in enterprises and government agencies, cyber attacks are increasingly difficult to prevent. But this evil of technology is in focus, and governments and businesses are willing to beef up their spending on information security.

This young corner of the broad technology space represents one of the few growth opportunities left for developed market investors. Growth will likely come from the rapid adoption of mobile, cloud, social and information technologies. In fact, it seems that the cyber security trend has reached a new level this earnings season, as most of the companies in the space impressed with robust results.

For investors seeking to play this trend in a basket form, there are a few options, PureFunds ISE Cyber Security ETF HACK being the most notable. Buoyed by the solid earnings, this product has surged 12.5 percent over the past ten days and about 13 percent since its debut in November. It has gathered enough interest from investors, accumulating $261 million in AUM in just three months.

Average daily volume is also solid as it exchanges around 282,000 shares in hand (read: Inside HACK: The Sought-After Cyber Security ETF).

Given this, it might be worth it to shed some light on this newly introduced ETF and its holdings for investors not familiar with it but thinking about jumping in on the space. Below we highlight some of the key details regarding HACK and how recent earnings have led to this fund's solid run.

HACK In Focus

The fund offers exposure to the companies that ensure the safety of computer hardware, software, networks, and fight against any sort of cyber malpractice. It tracks the ISE Cyber Security Index, holding 30 securities in its basket. It is well spread out across components, as each security holds no more than 5.71 percent of total assets.

From an industrial look, software and programming accounts for nearly two-thirds of the portfolio while communication equipment and Internet mobile applications round off the top three. In terms of country exposure, U.S. firms take the top spot at 71 percent, followed by Israel (13 percent), the Netherlands (5 percent), South Korea (5 percent), Japan (4 percent), Finland (3 percent) and Canada (1 percent).

Cyber Security Earnings In Focus

The torrid run in HACK was driven by the stellar Q4 earnings and a bullish outlook on CyberArk Software Ltd CYBR and the subsequent surge in its stock price. CYBR shares soared as much as 40.7 percent to record high of $64.45 since its earnings announcement on February 12. The stock takes the top spot in the fund's basket with 5.71 percent share (read: These New ETFs Could be Big Winners).

CyberArk reported earnings per share of 19 cents, outpacing the Zacks Consensus Estimate of a penny and saw nineteen-fold jump from the year-ago quarter. Revenues surged 81 percent year over year to $36.3 million and strongly surpassed our estimate of $27 million. The company projects earnings per share in the range of 4–6 cents on revenues of $25.5–$26.5 million for the ongoing first quarter. For 2015, revenues are expected to grow 23–26 percent to $127–$130 million and earnings per share are projected at 24–27 cents. The earnings guidance for both the quarter and the full year is much higher than the Zacks Consensus Estimate of a loss of 26 cents and earnings of one cent, respectively.

The cyber security ETF's second holding – Fireeye Inc FEYE comprising 5.55 percent share in the basket – also topped our estimates and guided higher. Net loss of 64 cents was narrower than our expected loss of 83 cents and revenues of $143 million exceeded our estimate of $141 million.

Fireeye expects revenues in the range of $118–$122 million for the ongoing first quarter and $605–$625 million for the full year.

Net loss per share is projected at 49–53 cents for the first quarter and $1.80–$1.90 for the full year. The Zacks Consensus Estimate at the time of earnings release was pegged at a loss of 79 cents and $3.18 cents, respectively. Fireeye has jumped over 24 percent to date post earnings announcement on February 11.

Further, Qualys Inc QLYS also contributed to the upside in HACK. The stock shot up as much as 21 percent and hit a new all-time high of $49.42 on upbeat earnings and robust guidance. The firm occupies the fourth position in the basket and represents about 4.57 of the fund (see: all the Technology ETFs here).

Earnings per share of 9 cents strongly outpaced the Zacks Consensus Estimate by 7 cents while revenues of $37 million also edged past our estimate of $36 million. For the first quarter, Qualys expects revenues of $37.6–$38.1 million and earnings per share in the range of 10–12 cents, which is much higher than the Zacks Consensus Estimate of 6 cents. It also projects 2015 revenues of $167.3–$169.3 million and earnings per share of 50–55 cents, well above our estimate of 34 cents.

Juniper Networks Inc. JNPR also contributed to the rally in HACK as it is one of its top 10 holdings, accounting for 4.18 percent share. It beat on both the bottom and top lines by 9 cents and $0.033 billion, respectively. Further, the forward guidance for the first quarter is also encouraging. The company expects earnings per share in the range of 28–32 cents, the midpoint of which is higher than the Zacks Consensus Estimate of 18 cents at the time of the earning release. Revenues are expected in the range of $1.02–$1.06 billion. Shares of JNPR rose nearly 9 percent since its earnings announcement on January 27.

Apart from the incredible cyber security earnings, HACK also got a boost from Obama's initiative taken at the first ever summit on Cybersecurity and Consumer Protection held last week. The president signed an executive order that focuses on consumer protection and private-public partnerships against cyber threats (read: Obama Budget Plan Drives Up These Sector ETFs).

Further, Russia's Kaspersky Lab, a major cyber security firm, released data on the widespread breach in the financial sector early this week that raises concerns about cyber security, propelling the stocks and the ETF higher. The report showed that group of hackers has stolen at least $1 billion from over 100 banks in 30 countries since late 2013.

Bottom Line

The cyber security ETF is showing relative strength and should continue to outperform the broad technology space in the coming months given the impressive earnings and solid guidance from many players. Further, the growing awareness for the protection against the cyber threats will likely take the space to new heights. So, for investors seeking to play the potential rise in cybercrime, HACK could be the ticket in 2015.