Hacker Scare Again Boosts Security Stocks

Get ready for a run on Internet security stocks.

With two high-profile hacker-related scares making global headlines in the past few days, investors can be expected to snap up shares of ‘Net security providers.

That’s what happened nearly one year ago, when a series of “denial of service” (DoS) attacks hit Yahoo and several other major Web sites. In one day following news of last February’s hacker activities, five different Internet security stocks climbed more than 20%, with one (WatchGuard Technologies) gaining 46%. Again, all in a single trading session. (See Hacking And Trading, A Powerful Combination.)

Granted, last February was – literally and figuratively – a different millennium for Internet stocks, which were still soaring as investors remained blissfully unaware of the large bear lurking around the corner.

But already, in the wake of Microsoft’s widely publicized DoS outages last week, ‘Net security stocks are on the rise. In Monday’s trading alone, five different Internet security companies saw their shares post double-digit gains. They are:

Ticker           Company                 %Gain

    V-One                    24.4
    Cylink                   20.0
    WatchGuard Technologies  13.2
    InterTrust Technologies  11.6
    Pilot Network Services   10.7

And that could just be a warm-up for Tuesday, when many investors will read for the first time that federal computer experts on Monday warned that a “critical” flaw in commonly used software that runs Internet directories could expose corporate and government Web sites to crippling hacker attacks. (See Security Flaws Found in Popular DNS Software.)

As I noted after last February’s DoS incidents, the run-up on Internet security stocks
isn’t particularly rational, since most investors have no idea whether any of the companies above sell products or services that effectively address the problem. It’s about opportunism.

Another stock to watch on Tuesday is Akamai Technologies – and unlike the security stocks, this one makes sense because AKAM runs a huge network of servers that help alleviate Internet traffic jams, which are a common result of DoS attacks.

Akamai shares rose nearly 7% on Monday following news that Microsoft has hired the Massachusetts company to run four of the eight servers it uses for its domain-name server network. (See Akamai Shares Gain on Microsoft Report.)

That’s the kind of information that helps investors zero in on the appropriate company. As the market absorbs Monday’s federal warning about the threat posed by flaws in the Berkeley Internet Name Domain software, look for Akamai shares to get another boost.