Get rich fighting crime

With excellent growth prospects, can investors afford to ignore this investing theme any longer?

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Figures released by the UK’s Office for National Statistics suggest one in 10 of us have been victims of cybercrime in the past year. In 2015/16, a staggering 5.8m incidents of online fraud and virus attacks were reported, far more than previously estimated (3.8m).

But we’re not the only ones at risk. Just a few days ago, the Greater London Authority Conservatives estimated that cybercrime costs businesses£35bn a year in the capital alone. Recent high profile hacks involving accounting software developer Sage and broadband provider TalkTalk appear to highlight how some companies are still lagging far behind others when it comes to protecting their staff, customers and ultimately, their profit margins.

Based on the above, we can be fairly sure that the need for improved security measures will grow exponentially for years, making it an attractive, long-term investment proposition. Here are some companies that may be worth investigating further.

Key players

Manchester-based NCC (LSE: NCC) is one of the leaders in the fight against cybercrime and a star player with consistent year-on-year revenue and earnings per share growth allowing for regular double-digit increases to the dividend (although admittedly, the yield remains small at 1.4%).

Unfortunately for prospective investors, quality rarely comes cheap. On a forecast price-to-earnings (P/E) ratio of just under 25, it will cost to add NCC to your portfolio. Then again, given its growth potential, this valuation could still be regarded as reasonable.

Despite having produced anti-virus software and encryption products for the last 30 years, Sophos (LSE: SOPH) is a relatively new arrival on the stock market. It’s likely to be an immediate beneficiary of more and more medium-sized businesses building their online presence and requiring increased security. Since listing a year ago, shares have dipped to a low of 175p following higher operating losses being reported compared to the previous year. Having rebounded to 255p today, investors will be looking for better numbers when the company releases interim results in November.

Perhaps one of the less obvious choices for riding this theme is £18bn cap BAE Systems (LSE: BAE). The company may be best known for building submarines and aircraft but it also has a rapidly growing cybersecurity division. Despite performing well since the EU referendum result (with its share price rising from 480p on 24 June to 550p today), BAE remains on a fairly attractive forecast P/E of just over 13. A well covered (for now) dividend yield of 3.8% should also appeal to income investors. Nevertheless, those interested in the company may wish to dig further given its massive pension deficit and the recent disposal of its shares by star fund manager Neil Woodford.

If in doubt, diversify

To mitigate company-specific risk, you could buy shares in all of the above. However, there’s a simpler, more cost-effective solution.

Yesterday, I commented on the many attractions of exchange traded funds, particularly for those just starting out in investment. Thanks to a surge in interest, the UK now has its first fund in this area, offered by ETF Securities (LSE: ISPY). Although the annual fee is relatively high (0.75%) when compared to one tracking the FTSE 100, this may be a price worth paying given the diversification on offer, lack of alternatives and the possibility of smaller constituents becoming takeover targets, thus providing even better returns for risk-tolerant investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares in ETFS ISE Cyber Security GO UCITS ETF. The Motley Fool UK owns shares of NCC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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