FireEye Inc (FEYE): What’s Behind The Surge In This Stock?

internet etfsJim Bach:  FireEye Inc. (NASDAQ:FEYE) stock closed today (Friday) up 6.4%.

But, FEYE stock wasn’t alone among a spate of top-tier cybersecurity stocks that received a boost. Palo Alto Networks Inc. (NYSE: PANW) stock was up just about 2.9% on the day. And Fortinet Inc. (Nasdaq: FTNT) stock soared 3.9%.

So what’s behind this surge?

Yesterday, news broke that Chinese hackers breached the personal data of at least 4 million current and former federal employees.

Traders flocked to key cybersecurity stocks on the news. The three cybersecurity stocks mentioned above were just a few names among a broad selection in the subsector that saw gains on the day.

Even a lesser known small-cap like KEYW Holding Corp. (Nasdaq: KEYW) was up about 10.6%.

While cybersecurity stocks are without question going to be a big investment in the long term, it’s important that you don’t try to pick the winners too early.

Cybersecurity is an inexact science. For each threat that is thwarted, a new one emerges. And a new solution will need to be brought to market.

No one company is going to have the answer. And trying to play cybersecurity stocks in this manner will shut you out from the profits that this sector as a whole is set to reap in the long term.

At face value, yes, the news today would suggest that that FEYE stock was the best pick.

But here’s what investors need to understand before piling in to FEYE stock…

Why Traders Flocked to FEYE Stock Today

It’s easy to see why FEYE stock got a jolt from what turned out to be the most recent in a long line of breaches.

It all comes back to FireEye’s acquisition of Mandiant in January 2014. Mandiant proved a huge asset to FireEye on the day of the purchase, as the FireEye stock price soared 28% on the day.

Mandiant’s claim to fame came in 2013, when it investigated and exposed an extensive, multi-year campaign of cyber espionage by the Chinese.

It’s natural that when Wall Street hears “China” uttered in the same breath as “cybersecurity breach,” they think Mandiant. And, by extension, they buy FEYE stock.

But here’s what’s important to keep in mind about buying cybersecurity stocks …

You shouldn’t be buying them to capture quick profits every time reports surface that a hack took place.

Cybersecurity is important – but it doesn’t mean FEYE stock isn’t volatile. In fact, in 2014, FEYE stock was up as much as 119%, fueled largely by its Mandiant acquisition, before it fell 73% from its highs earlier in the year by October 2014.

What you should instead be more in tune to in the cybersecurity market is the M&A that is going to take place in the years ahead.

The first blockbuster deal in the space came in August 2010 when the chipmaker Intel Corp. (Nasdaq: INTC) bought McAfee.

And in the year preceding FireEye’s Mandiant deal, a flurry of cybersecurity M&A took place.

Among the biggest cyber deals of 2013 were Vista Equity Partners LLC buying Websense for $1 billion, Cisco Systems Inc.’s (Nasdaq: CSCO) $2.7 billion purchase of Sourcefire, and International Business Machines Corp.’s (NYSE: IBM) $1 billion purchase of Trustee.

And even last month FEYE stock experienced a quick 5% jump on rumors that Cisco was considering purchasing the company. The rumors were quickly rebuffed by Cisco CEO John Chambers, however, and the deal never happened.

A lot of what has fueled the rise in stocks like Palo Alto Networks and Fortinet isn’t simply traders stringing together one cybersecurity breach news item after another to create an uptrend – even if they all do seem to soar on news.

Fortinet, Palo Alto Networks, and FireEye are often either rumored to be, or discussed as, prime acquisition targets for bigger companies like Hewlett-Packard Co. (NYSE: HPQ) and Cisco, looking to build and expand on cybersecurity solutions.

Wall Street values the consolidation of the cybersecurity industry because, right now, that’s the only tangible development that can be made in this relatively unexplored industry.

Just a decade ago, cybersecurity solutions were confined to basements and garages. They weren’t being as heavily discussed in boardroom presentations. Cybersecurity was a passive operation. Businesses would check off a list to ensure compliance of Sarbanes-Oxley Act provisions as opposed to actively trying to get ahead of growing cybersecurity threats.

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