What happened
Wall Street ended the week on a high note. The broader economy took center stage as investors digested the latest monthly jobs report and what it means for the direction of the overall economy. While the jobs market remains remarkably robust, the data offered tantalizing clues that the results weren't as strong as they initially appeared. This gave investors hope that the Federal Reserve Bank is making headway in its battle with persistent inflation.
While the general market rebound no doubt added fuel to the fire, a number of stocks in the cybersecurity industry generated more-robust gains. Cloudflare (NET 1.44%) jumped 7%, CrowdStrike Holdings (CRWD 2.03%) and CyberArk Software (CYBR -1.01%) each climbed 6.3%, and Zscaler (ZS 1.28%) rose 6%, as of 3:26 p.m. ET on Friday.
A check of all the usual sources -- regulatory filings, analysts' commentary, and financial reports -- found no company-specific news driving the gains, but there was a breaking story that might help explain what drove these stocks higher.
Image source: Getty Images.
So what
The monthly jobs report from the U.S. Bureau of Labor Statistics showed that total nonfarm payrolls increased by 336,000 during the month of September, which was well ahead of economists' forecast of 170,000. Furthermore, the unemployment rate was also higher than anticipated at 3.8%, ahead of the 3.7% forecast by economists.
During periods of high inflation, stronger jobs data would normally be viewed as problematic, since it suggests the economy remains remarkable hot. The Fed has been working to cool economic growth -- and by proxy, the labor market -- and the initial read on the data suggests growth isn't cooling as much as the Fed would like. This also suggests that interest rates will remain higher for longer in order to address runaway inflation.
However, the devil is in the details, and digging a little deeper into the data reveals cracks in the façade. A review of the household data showed that the unemployment rate held steady at 3.8% and the number of unemployed persons was unchanged at 6.4 million. Average hourly earnings rose just $0.07, or a gain of 0.2%.
Stable unemployment and modest wage growth suggest that top-line figures were skewed by seasonal hiring data, and not nearly as strong as initially feared.
Now what
The jobs report aside, there was likely another factor at play that helped lift cybersecurity stocks.
In a regulatory filing on Friday, MGM Resorts International (MGM -2.58%) revealed that a data breach that the came to light last month will ultimately cost the company an estimated $100 million. MGM also admitted that cyberthieves gained access to a host of personal information, including names, phone numbers, email addresses, birthdates, and driver's license numbers. There also were a limited number of Social Security numbers and passport numbers that were stolen.
The breach was discovered early last month and forced the shutdown of the casino's IT systems, which in turn disrupted online booking, slot machines, and guest room access, among other issues.
This highlights the need for advanced cybersecurity systems, because the cost to implement such protections is often far less than the cost of the breach. There's also the matter of loss of reputation, as customers might think twice before using the services of a business that has been hacked.
For investors seeking bargains, they won't find any here, as our quartet of stocks all sport lofty valuations. Cloudflare, CrowdStrike, Zscaler, and CyberArk Software are selling for 12 times, 11 times, 9 times, and 8 times forward sales, respectively, when a reasonable price-to-sales ratio is between 1 and 2. That said, I own Cloudflare, CrowdStrike, and Zscaler, and will continue to add to these positions.
All four companies are expected to grow revenue and earnings by strong double digits over the next couple of years. And every time another high-profile company admits that it was the victim of a sophisticated hack or data breach, it increases the likelihood that other companies will deploy effective cybersecurity solutions in order to avoid the cost, trouble, and embarrassment suffered by their peers -- which benefits our quartet of stocks.
That's why cybersecurity will continue to be a growth industry and why these stocks were significantly higher today.
