Top Small-Cap Crime-Prevention Stocks

NICE Systems Ltd. (NICE 1.00%) specializes in hardware and software that captures and analyzes customer interactions across a multitude of platforms -- very useful for crime prevention. Meanwhile, Allegion Plc (ALLE -0.34%) manufactures security doors and locks for use by corporations and homes alike. Let's take a brief look at both companies and what makes them attractive for this investing theme.

NICE Systems
The company is best known for its contact-center solutions and for selling compliance and monitoring systems to financial firms. If a company needs to monitor interactions, optimize customer experiences, ensure compliance, fight financial crime, or merely protect its people or assets from external and internal threats, then NICE is the company to call.

The increasing use of multi-platform contact points (between customers and corporations) has created strong growth opportunities for the company. People don't just interact by phone with companies -- other contact points such as emails, social media, mobile communications, and video are increasingly being used. As such, NICE has good long-term growth prospects from four main sources:

• Regulatory and compliance requirements are becoming more complex, especially for financial forms.
• Big-data analytics solutions are increasingly relevant in an age of multi-platform contact points, and companies need to analyze customer interactions to deliver better customer experiences.
• Crime prevention is a growing industry as attacks on corporations -- both internal and external -- are becoming more sophisticated.
• Use of NICE's cloud-based contact-center solutions is increasing.

While its long-term prospects look good, this year management has been busy divesting non-core assets to focus on core competencies. For example, NICE recently announced an agreement to sell its video surveillance unit for up to $100 million. This follows a deal in May, whereby NICE sold its cyber and intelligence unit for up to $158 million.

The sales are likely to hold back EPS growth in 2015, with the company reducing guidance by a total of $0.15 because of foregone earnings from the divested businesses. The following table shows analyst estimates for EPS, but you should consider that if the 2015 figures had the $0.15 added back, then the growth rate would be closer to 12% in 2015.

Sources: NICE Systems presentations, Yahoo! Finance.

All told, NICE is certainly a business in a growth phase, but I think its current valuation suggests that the upside is limited for stock for near time. However, investors should watch the stock closely to see if management can continue to grow revenue and expand earnings margins.

NICE EV to EBITDA (TTM) data by YCharts

If you're looking for a stock to play the security theme, then NICE could fit the bill. Throw in its opportunity to grow sales of its big-data analytics and cloud solutions, and it appears the company should do well in future years.

Allegion
One of the most attractive aspects of the Internet of Things is how it's allowing companies to add value and functionality to old-economy products and technologies. In the case of Allegion, the company is forging ahead in adding wireless and Web-enabled technologies to its security locks. Embedding wireless devices into locks will enable companies and households to use apps to monitor and control locks remotely -- an obvious security benefit.

Moreover, users will be able to provide a broad range of options, including biometrics, to provide access to locks, while smart locks can obviously provide information and alerts as to whether doors are open, or even whether a break-in attempt has occurred.

In an earlier article I discussed the specifics of its end markets and the position Soros Fund Management is building. Simply put, Allegion's key end market is the North American commercial real estate market. The evidence from the current earnings season suggests that this is one of the stronger markets in the industrial sector in 2015. For example, it's the only segment that Emerson Electric reported underlying sales growth in, and Johnson Controls is gearing up for growth in its core U.S. institutional markets.

Sources: Allegion presentations, Yahoo! Finance.

Similar to NICE, Allegion doesn't look particularly cheap right now, but if you believe that corporations will accelerate adoption of its electronic locks, then there may be some upside to the estimates.

The takeaway
Both stocks don't look cheap, but they both present opportunities to invest in the security theme, as well as increasing use of growth technologies such as the Internet of things, big data, and cloud-based solutions. If their end markets take off as expected, then both stocks are attractive.