Cybersecurity Stocks Stunned By Palo Alto, Patience Is Prudent With WCBR

Palo Alto Networks (PANW) plunged post-earnings last week. The once high-flying cybersecurity stock fell from near $380 to about $260 peak to trough in February. Shares have since bounced as investors re-assessed the situation. Such major corrective moves are not uncommon following meteoric rises in key investment themes in volatile niches. For many investors, a more diversified portfolio of industry companies can help buffer against such seismic single-stock drops. Let’s dig into a lesser-known cybersecurity fund to see if now’s an opportunity to buy on the cheap.

I have a hold rating on the WisdomTree Cybersecurity ETF (NASDAQ:WCBR). It features an expense ratio lower than two of its primary competitors but also has risks with respect to concentration, while seasonality trends assert that patience now through March could be warranted. In the long term, it’s hard to argue against expected growth in cybersecurity enterprise investment. Finally, I will lay out the technical case for not getting overly aggressive today is the right approach.

Palo Alto Historical Drawdowns: -30% Peak to Trough in 2024 So Far

According to the issuer, WCBR is designed to track the performance of companies primarily involved in providing cyber security-oriented products that meet Index eligibility requirements. It can be used by investors to gain targeted exposure to companies driving innovation in cybersecurity technologies and can complement growth or technology holdings.

WCBR follows the WisdomTree Team8 Cybersecurity Index (WTCBR). This index consists of cybersecurity companies considered leaders in driving developments and innovations in the industry. It’s constructed with the help of data from Team8, a Global Venture Group specializing in cybersecurity, data, artificial intelligence, and fintech. The team highlights eight industry trends, including Cloud Security, Security of Things, Perimeterless World, Data Security, Resilience & Recovery, Shift-Left, Smarter Security, and Layer 8.

Team8’s Major Industry Trends

Cybersecurity: A Bullish Long-Term Investment Theme

The index uses a proprietary methodology that considers a company’s involvement in cybersecurity development themes and its revenue growth and focuses on firms exhibiting fast top-line growth.

Team8 Cybersecurity Index Methodology

WCBR is a small ETF. Total assets under management (AUM) is just $101 million as of February 23, 2024, but the fund’s share-price momentum is very strong, earning it an A+ ETF Grade by Seeking Alpha. Still, I will highlight some cautionary signals the chart displays today. The fund’s annual expense ratio is not all that high at 0.45% and its dividend yield, according to WisdomTree, is just 0.08%.

Risk metrics are weak with WCBR given somewhat high volatility and a concentrated portfolio. Finally, liquidity can be questionable at times since the average daily volume is low at less than 100,000 shares while its 30-day median bid/ask spread can be wide at times, averaging 11 basis points, so I encourage investors to use limit orders during the trading day.

The 3-star, Bronze-rated ETF by Morningstar plots on the far-right side of the style box, indicating that the allocation is focused on growth, not value. Moreover, just 24% of WCBR is considered large cap, adding to potential risk considering the ample small- and mid-sized equity exposures. Morningstar lists the current price-to-earnings ratio at 45x while long-term EPS growth is seen just above 10% – the resulting PEG ratio is lofty. Finally, the issuer notes WCBR’s price-to-sales ratio being above 8x – another sign of a richly priced fund.

WCBR: Portfolio & Factor Profiles

So what’s in this high-P/E ETF that might make it a worthy investment? Some of the strongest-returning names are at the top of the holdings list. CrowdStrike (CRWD), Elastic N.V. (ESTC), SentinelOne (S), Cloudflare (NET), and Zscaler (ZS), each up 60% or more in the last year, are the largest positions.

Prospective investors should be aware that WCBR is currently 100% invested in the Information Technology sector. There’s also limited geographical diversification.

WCBR: Top Holdings, Geographic Allocations

Seasonally, WCBR does not have a lengthy trading history, so I reviewed trends in a competing ETF, the Amplify Cybersecurity ETF (HACK) which dates back nearly a full decade. Heading into March, the third month of the year has averaged a flat return, but gains have been stout from April through August. Thus, being patient now through the end of the first quarter could be wise if you are long-term bullish on the space.

Cybersecurity Seasonality: Bullish April Through August Stretch

The Technical Take

WCBR endured a tough bear market from late 2021 through the end of 2022. Shares were sliced in half, but then a strong rebound commenced. Notice in the chart below that the ETF established a bearish to bullish rounded bottom reversal pattern from mid-2022 through late last year. Key resistance had been in play between $21 and $22. Its long-term 200-day moving average inflected higher in Q3 last year before the ETF zoomed higher after pulling back to $19 this past October. Following an upside breakout above its September peak, an upside-measured move price target to near $29 was triggered (the previous range was $7, add that on top of the $21-$22 breakout price). Shares hit that objective earlier this year on intense volume, but PANW’s decline left its mark on WCBR.

Take a look at the RSI momentum gauge at the top of the graph. It printed a lower peak when the fund made a fresh high in price earlier this month. That’s considered bearish momentum divergence in the eyes of technicians. Moreover, the latest tick down to about $25 came alongside a weaker RSI print compared with the momentum reading when the ETF dipped under $24 in January – that tells me that the momentum situation is much softer this year versus what was seen in the final two months of 2023.

Overall, after hitting its technical measured move target and with the previous all-time high just above $30, further consolidation may make sense through the quarter end.

WCBR: Shares Reach Their Measured Move Target, Bearish RSI Trends, Big Volume Comes In

The Bottom Line

I have a hold rating on WCBR. The valuation is high, but investors do get access to what could be some of the major long-term beneficiaries of high enterprise investment in cybersecurity. There will be bumps along the way, though, and Palo Alto’s recent retreat may portend a consolidation before the next leg up.