Betting On Cybersecurity Rebound With ETFs

Cybersecurity stocks were the toast of the town through the first six months of this year, but now well off the industry's June highs, as represented by one well-known exchange traded fund, cybersecurity equities are in the midst of a lengthy pullback.

However, bullish billings growth, as highlighted in a recent research note by Wells Fargo Securities posted by Barron's, could be a harbinger of a rebound for cybersecurity stocks and the PureFunds ISE Cyber Security ETF (NYSE:HACK), the largest cybersecurity ETF.

Wells Fargo the companies that really standout in terms of billings growth are Palo Alto Networks Inc. (NASDAQ:PANW) and CyberArk Software Ltd. (NASDAQ:CYBR). Those two stocks combine for over 8 percent of HACK's weight. Wells Fargo rates the companies outperform.

CyberArk and Palo Alto exhibited the best billings growth at 131% and 69% year-over-year, respectively. In addition, CyberArk and Palo Altos sales and marketing efficiencies outpaced peers meaningfully with one dollar of S&M spend translating into a $1.80 of absolute growth for CyberArk and $1.17 for Palo Alto versus the median of 69 cents. We think these metrics show that CyberArk and Palo Alto are benefiting from more than just a macro tailwind or good marketing and that their respective product sets are resonating well with customers, said Wells Fargo.

The bank also has Outperform ratings on CheckPoint Software Technologies Ltd. (NASDAQ:CHKP), FireEye Inc (NASDAQ:FEYE), Fortinet Inc. (NASDAQ:FTNT) and Proofpoint Inc. (NASDAQ:PFPT). Those stocks combine for nearly 18 percent of HACK's weight. By comparison, HACK's newly minted and smaller rival, the First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ:CIBR), allocates just under 16 percent of its combined weight to CheckPoint, FireEye, Fortinet and Proofpoint.

Still, what is good news for one cybersecurity ETF is likely to be good for the other and what is good for either of those ETFs is probably going to be really good for the Direxion Daily Cyber Security Bull 2X Shares (NYSE: HAKK). HAKK, which debuted Wednesday, is the first leveraged cybersecurity ETF and is designed to deliver double the daily performance of the same index HACK follows.

The pace of upside surprises with regards to billings in the second quarter was slightly above first-quarter levels. The median beat of 7.9% compared to 7.2% in the first quarter and 6.6% in the fourth quarter, and marked the best performance in the seven quarters that we have been tracking these statistics, according to Wells Fargo.

Sounds like good news for HACK, which has outperformed CIBR by 23 basis points since the latter came to market. Traders willing to bet that either Wells Fargo is off on cybersecurity stocks, the current slump will continue or both can consider HAKK's bearish counterpart, the Direxion Daily Cyber Security Bear 2X Shares (NYSE: HAKD).

HAKD, the first inverse cybersecurity ETF, also debuted today.