Computer hacking, and the enormous threat it poses to individuals, companies, and governments, is a big and ever-present downside to the Internet age. While egregious examples make headlines—including the recent hacking into the computers of Anthem, the country’s second-largest medical insurer, by cyber criminals who gained access to the most intimate data of some 80 million individuals—hacking occurs all the time below the radar. When China previewed a new jet fighter that compared favorably with one of ours, one commentator remarked it was hardly surprising, since the Chinese started with our plans and went on from there.  

The urgent need to protect information has spawned a burgeoning cyber security industry dedicated to keeping secrets and data safe. Given the potential for havoc that computer hackers can wreak, it’s no exaggeration to view this as comparable to fighting a war.

We think investors should have a stake in this war, as long as they’re careful to back the right warriors. New companies keep entering the field, and most of them are destined to be duds. But if you follow some simple rules—which apply equally to picking stocks in other arenas as well—you could have a major winner.

A critical “not” is falling for a company touting a brand-new technology as solving the problem once and for all. Cyber security is a moving target, and there never will be a magic bullet. This caution applies especially to new entrants to the field: with rare exceptions, most will be short-lived firecrackers rather than long-term winners. There will be an initial surge in interest when the company first demonstrates its wares, but unfortunately it won’t just be potential customers that are paying attention, but potential hackers as well.

A better approach is to focus on companies that have been through more than one war and are still standing. And despite the advanced technologies that characterize the field, beware of overpaying, as the nature of cyber security nearly precludes a company being able to maintain very rapid long-term growth. If anything, be more conservative in this arena than in others, casting a skeptical eye on new companies and on companies whose stock price is valued based on expectations of explosive long-term growth.

In a recent issue of The Complete Investor, we review five stocks that present a varied lot.  Three are dedicated cyber-security companies. Two have been successful in other areas and have added cyber divisions to an array of growing parts. But all are reasonably valued in view of solid long-term records and reasonable future PEG ratios.