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How to Beat the Hackers at Their Own Game

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Our digital infrastructure carries real risks but potential opportunities for investors.

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The first publicly known attack came in the 1980's, when the KGB hired West German hackers to penetrate US military and research networks.

In the years since, cybersecurity attacks against both military and civilian installations have become more sophisticated and well publicized. In 2007, the Departments of Defense, State, Homeland Security, and Commerce and NASA all suffered major intrusions by unknown foreign entities, according to the Center for Strategic and International Studies.

Perhaps not surprisingly, then, President Barack Obama has made cybersecurity a priority of his administration. "[I]t's now clear this cyber threat is one of the most serious economic and national security challenges we face as a nation," he said in a speech in May. And on Monday, the White House's acting cybersecurity czar announced her resignation. So, for now, the White House cybersecurity post is still unfilled.

However, the threat from foreign enemies and rogue hackers continues, threatening both public and private sector cyber infrastructure. It also presents potential money making profits for companies developing technologies to beat back the cyber threat, and for nimble investors thinking about market opportunities.

What motivates the cyber criminal? Michael Lewis, a senior research equity analyst at BB&T who covers defense, points to a few broad reasons.

First: information theft. Hackers are often looking to steal data from a targeted personal device, system, or network. For instance, Lewis notes the case of a disgruntled employee from Boeing (BA) who removed more than 320,000 sensitive computer files using a thumb drive to tap the corporate system. Boeing estimates that the stolen information could have cost up to $15 billion in lost revenue had it been sold.

A second goal: information disruption. A ne'er-do-well, armed with digital know-how, might sneak into Uncle Sam's systems and mess with critical operating data. In 2006, for instance, a disgruntled Navy contractor inserted malicious code into five computers at the Navy's European Planning and Operations Command in Naples, Italy, rendering two computers inoperable. If three others had been knocked down, according to Lewis, the network that tracks US and NATO ships in the Mediterranean would have collapsed.

Finally, there is what Lewis refers to as information denial, those pesky hacks who shut down private or government computer systems with floods of automated hits.

Whatever their motivation, hackers are capable of causing a potentially great deal of damage very quickly, whether it's to national security or a company's bottom line. In 2008 alone, cyber criminals ripped off intellectual property from businesses worldwide worth up to $1 trillion.

"What the public has to understand is that the threat of cyber thieves accessing individual confidential information or national security information is only growing," Lewis told Minyanville.

As the cyber threat continues, Lewis and his crew of analysts project that the cyber security market will grow in the 8% to 11% range through government fiscal year 2014, and he hastens to add that he thinks those projections are based on conservative assumptions.

Within his coverage universe, the analyst believes that the primary competition in the cyber-domain will likely include ManTech International (MANT). "Their core business is related to the intelligence community, which will be leading the charge in the cyber growth area," he says.

He also thinks CACI International (CACI) will benefit, given its strong position in the US Army intelligence area, as will L-3 Communications (LLL). "They will benefit in two ways: they have a large IT business and they have a strong position with the US Navy."

Other primary competitors in the cyber-domain, according to Lewis, include Applied Signal Technology (APSG), Argon ST (STST), Dynamics Research (DRCO), NCI (NCIT), and SRA International (SRX).

No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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