CIBR - CIBR: Cybersecurity Stocks Rallying Into Earnings Season Improved Momentum

2023-07-24 16:27:58 ET

Summary

• The First Trust NASDAQ Cybersecurity ETF may experience a lull in volatility as many cybersecurity firms report earnings later in the period.
• CIBR, the largest cybersecurity ETF with $5.1 billion assets under management, is heavily exposed to the software industry and has a high price-to-earnings ratio of 22.3.
• Despite a lofty expense ratio and valuation, CIBR holds many high-growth stocks in a growing industry and has a defined risk and reward level to monitor.
• I outline key price levels to monitor on this strong-momentum thematic industry ETF.

Earnings season heats up this week and next with many big-name tech stocks issuing second-quarter results. Cybersecurity firms, however, generally report in the later weeks of the earnings period.

So, there could be a relative lull in volatility in the First Trust NASDAQ Cybersecurity ETF (CIBR) over the next few weeks. Thus, it is an ideal time to consider whether to own a portfolio of these secular growers. According to Gartner , “By 2025, the consumerization of AI-enabled fraud will fundamentally change enterprise attack surface driving more outsourcing of enterprise trust and focus on security education and awareness.”

I have a buy rating on CIBR, but investors should understand some of the fund’s pain points, too.

Key Earnings Events Among Cybersecurity Companies

According to the issuer , CIBR tracks an index of "the performance of companies engaged in the cybersecurity segment of the Information Technology and Industrials sectors. It includes companies primarily involved in the building, implementation, and management of security protocols applied to private and public networks, computers, and mobile devices in order to provide protection of the integrity of data and network operations."

CIBR is the largest cybersecurity ETF. With assets under management of $5.1 billion as of July 21, 2023, it’s bigger than its peers and it features strong liquidity . The ETF’s 30-day median bid/ask spread is just three basis points and typical volume is more than 400,000 shares despite being a niche industry fund.

With a 2015 inception, the strategy has a moderately long track record, though it is not a cheap fund as its current expense ratio is 0.60% (as of February 1, 2023). It’s also a concentrated portfolio since only 35 securities are held. Income investors probably won’t like CIBR much—the trailing 12-month dividend yield is 0.32%.

Digging into the portfolio, CIBR has exposure to all of the Morningstar Style Boxes, save small-cap value, so there is some diversification here. But in general, the ETF is very much oriented to the growth style and with a median market cap of $11.1 billion, according to FirstTrust, there is a high amount of small and mid-cap exposure with less than one-third of the allocation in large-cap equities. Earnings quality is low while volatility is high in the factor breakdown. CIBR is not a value fund. That is evidenced by a current price-to-earnings ratio of 22.3, per Morningstar, and a high price-to-sales ratio of 3.1.

CIBR: Portfolio & Factor Profiles

It’s important for investors to recognize that CIBR is high exposure to the Software industry. As of July 21, 2023, 50.1% of the allocation is housed in that high-growth niche while 16.8% is considered IT Services. It is also key to keep tabs on the top five positions which encompass about one-third of the ETF's portfolio. There's also some AI exposure with a significant weight in shares of Broadcom ( AVGO ), for instance.

CIBR: Top Holdings & Industry Exposure (Quarter-End)

Seasonally, cybersecurity stocks tend to trade sideways now through early November, so this is not exactly a bullish period on the calendar, according to data from Equity Clock . So, being particularly about your entry (or exit) timing is key over the remainder of Q3 and to begin Q4. Bullish trends then tend to pick up into year-end.

CIBR: Neutral to Slightly Bearish Seasonality through Early August

The Technical Take

With a somewhat high expense ratio and high P/E, the chart appears constructive in my view. Notice in the chart below that shares put in a bullish rounded bottom reversal pattern from the middle of last year through Q2 of 2023. Today, shares are right back at their best marks since August last year.

With a newly rising 200-day moving average and a bullish golden cross back in April, the bulls appear in control. If the ETF can bust through the $47 point on a closing basis, then I see next resistance at the early 2022 peak near $54. Support should be found at previous resistance – that polarity point is the $42 to $43 zone.

Overall, I like the technical setup, but buying on a retest a few bucks lower could also work.

CIBR: Bearish to Bullish Reversal, $47 Current Resistance, $43 Support

The Bottom Line

I have a soft buy rating on CIBR. While its valuation is on the lofty side, the fund holds many high-growth stocks in a secular growth industry. And while the expense ratio is also higher than my liking, momentum has improved on the chart, and we have defined risk and reward levels to monitor.

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