5 Top-Rated Security Stocks

The Web is wonderful. The Web is awful.

Not exactly a Dickensian turn of phrase, I know, but it's the best way I can find to describe the trouble with cloud computing. The Web, once thought to be free of loopholes, has a massive one that wasn't fully patched as of Friday, The New York Times reports.

Terrible news, right? Sure, especially if you're as bullish on cloud computing as I am. Yet, as investors, we're trained to see problems as moneymaking opportunities. Here, I'm compelled to look more closely at the stocks of digital security suppliers.

Would somebody please call security?
But let's first review the problem, which is with the Web's addressing system. Known as DNS -- or Domain Name System -- it's a method of keeping websites distinct. Most of the world's .com names are stored in DNS servers.

They're apparently tailor-made for hackers, who need only add a few bits of data to any packet traveling through a DNS server in order to reroute it. Call it a digital bait-and-switch. Packets headed for, say, Amazon are fooled into thinking they've arrived at their destination when, in fact, they're at a shell page. AT&T (NYSE: T  ) was recently subjected to just such an attack.

Fortunately, no passwords were lost and no identities were stolen. Still, the incident raises a troubling question. Since the Web is a massive business enabler, perhaps the greatest economic engine in history, what happens if it isn't secure?

I'll take "how your portfolio could go to zero overnight" for $800, Alex
Certainly, profits for Web-dependent companies would tumble -- companies such as Google (Nasdaq: GOOG  ) and salesforce.com (NYSE: CRM  ) , for example. But I think that's unlikely. Google, salesforce, and their peers have vast experience in digital security. Without it, they'd be sunk.

Physical security, too. Google is completely mum about how many servers it has -- the rumors suggest more than 450,000 -- but its data centers are said to be as remote and well-guarded as some nuclear missile sites, including round-the-clock armed guards and biometrics.

Yet this current flaw isn't so much about network durability as it is about trickery; hackers want to divert traffic, not stop it. They want you to think that you've arrived at your bank's website when you're really at a dummy page that scrapes and stores passwords for later use.

The AT&T attack proves that these digital head fakes can work. That's the bad news. The good news is that the Web is getting an upgrade as I write. DNS servers won't stay vulnerable forever.

Upgrade your portfolio with security stocks
Meanwhile, Web-connected businesses -- which may as well be every business in America with a website that enables some form of customer interaction -- are also likely to upgrade their networks. Welcome to the opportunity section of today's article. Here are the top five stocks in security software and services as determined by our Motley Fool CAPS community:

Security Software & Services Firms

Last Closing Price

CAPS Stars (out of 5)

52-Week Return

GlobalScape

$1.31

*****

(71.7%)

Double-Take Software (Nasdaq: DBTK  )

$11.83

*****

(33.4%)

VASCO Data Security

(Nasdaq: VDSI  )

$13.51

*****

(54.6%)

Secure Computing

(Nasdaq: SCUR  )

$4.64

*****

(42.1%)

Aladdin Knowledge Systems

(Nasdaq: ALDN  )

$11.12

****

(47.8%)

Source: Motley Fool CAPS.

Tech stocks as a whole have been getting crushed, so it's no surprise to see security suppliers -- even top security suppliers -- down. Some are also seeing spending cuts and, therefore, slower growth. Secure Computing is one. It's also a stock I like for its TrustedSource technology, which rates Web content for its trustworthiness -- a strategy that's likely to make it harder for DNS tricks to succeed.

But my favorite of this group is VASCO Data Security. CEO Ken Hunt was a buyer of his company's shares in April, and VASCO is in an interesting position. It specializes in sales to financial institutions. Smart. Banks have more to lose than most when it comes to digital security.

Still, there are risks with this company. Second-quarter operating profits fell, and revenue grew just 9%. Hunt, meanwhile, said that revenue growth would moderate from the blistering pace VASCO had seen. Ouch.

Yet VASCO is still winning customers. Big names that use its services include Citigroup and Wachovia. No one can be surprised to see these firms spending less over the short term. Nor is it a bad idea for management to trade lower margins today for guaranteed revenue in future years. Banks, like other firms that depend on digital channels, will bounce bank.

And when they do, they'll need e-sentries to protect their profits and their online customers. Sentries like, you know, VASCO. Problem, meet opportunity.

Get your clicks with related Foolishness:

Amazon, Double-Take Software, and VASCO Data Security are Motley Fool Stock Advisor selections. Aladdin Knowledge Systems is a Motley Fool Hidden Gems pick. Try either of these market-beating services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers owned shares of Google -- and Google's 2010 LEAP options -- at the time of publication. When he's not typing up articles for Fool.com, you'll find him picking growth stocks for Rule Breakers, which counts Google among its holdings. Get access to all of Tim's writings here, or enjoy a daily dose of his Foolishness via this feed for your RSS reader.

The Motley Fool's disclosure policy weaves webs of wonder with words.


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