Cyber Warfare

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The accusations by the U.S. government that Iran was behind the recent spate of cyber-attacks against large Western financial institutions like Citibank (C) and Bank of America (BAC) aren't surprising. However, coming on the heels of cyber-attack accusations against Russia and media confirmed attacks by Israel and the United States (against Iran), it should be a big wake up call. Cyber war is real and any day now such attacks could get much bigger. The military may see its budget cut, but it’s highly likely that cyber war initiatives will continue to be amply funded. There are a few companies you should watch.

War on the People!
Using cyber-attacks was once the domain of technology geeks looking to show off. Often the outcome was little more than Internet graffiti, costly but not overly harmful. Quickly things went wrong, however. Loose groups of hackers became more organized and tried to make political statements. Eventually, organized crime became an issue, as mass attempts to rip people off sprung up when the hackers, and others, realized that money could be made off of unsuspecting consumers.

These types of cyber-attacks are the purview of anti-virus software firms like McAfee, a subsidiary of chip giant Intel (NASDAQ: INTC). As individuals continue to see their computers attacked, this area of security is going to see increased demand. While chips are still the main business for Intel, having a toe in what will be a growing protection field should be a long-term benefit. More so if Intel starts to include such protections in its chips—making computers safer from within.

War on a Country!
These attacks, however, aren't as serious as what has been going on of late on the country level. With the United States and Israel publicly outed by The New York Times (NYT) as the culprits behind the Stuxnet virus that helped to destroy Iran's nuclear capabilities, it is clear that cyber warfare is real. In fact, Russia has also been accused of using cyber-attacks. While the perpetrating countries will all claim righteous backing for their efforts, in the end, the more use of this method there is, the more risk that a really big attack does material damage.

This is an increasingly important issue as more and more processing and data is moved to the so-called web-based “clouds” run by companies like Amazon (AMZN) and Google (GOOG). Even such important things as the electrical grid, where some claim Chinese created malware has been uncovered, are connected via the Internet.

Imagine the impact if Amazon or Google's cloud servers went down. Although cyber-crime isn't suspected, Netflix (NFLX) recently experienced a glitch that roiled its service over the holiday season. It uses Amazon's cloud. What would happen if the Department of Defense had its servers attacked?

On Call
While this should be a scary topic, it isn't one that has gone unnoticed by the government or by the military industrial complex. Thank goodness! Note, too, that while we may not buy as many tanks because of the current economic issues facing our country, funding for cyber warfare isn't likely to see its funding decline. It's too big a concern.

Working with the government with sensitive computer systems and information isn't something that any old company can do. The company and its employees need special clearance and checking to ensure that they are who they say they are and, more importantly, can be trusted. Thus, companies like Northrup Grumman (NYSE: NOC), Lockheed Martin (NYSE: LMT), and Raytheon (NYSE: RTN) are important players in the cyber war space.

The times are changing, and so is Northrop Grumman. Like most of the other defense contractors, the company has its fingers in a lot of pies. However, today, cyber security is the second items on its list of capabilities. The list starts with unmanned drones, a particularly hot area right now. Regardless, Northrop's management clearly has their head around the importance of cyber security. A close to 3.2% yield and strong financial profile, make this an interesting choice for investors looking to benefit from cyber security.

Like Northrop, Lockheed Martin is a massive player in the defense arena. Although it doesn't put its cyber capabilities front and center, they are prominently highlighted under the company's Information Technology services. From securely testing wireless systems to its cyber forensics lab, Lockheed is a leader in the cyber ware space.

Lockheed has been aggressively returning value to shareholders in recent years, with over a decade of dividend increases under its wings and a nearly 5% dividend yield. Dividend investors should definitely be looking at this company.

Raytheon, another of the big boys in the military/industrial complex, has an equally diverse portfolio of products and services. Like Northrop, Raytheon lists cyber security second on its list of capabilities. The interesting thing, however, is that electronic warfare is also listed (third). While this division is geared toward helping the military better manage war time actions, all of this division's systems make use of connectivity. Protecting these systems is a vital part of any combat scenario and will likely see continued funding regardless of other cuts. These two very highly public capabilities, then, are tightly connected for Raytheon.

The company has notable pension liabilities, but is generally financially strong. A yield of nearly 3.5% and a company focus around technology makes Raytheon an interesting option in the cyber ware space, too.

Black Swan?
Although the government and the military/industrial complex is ready for cyber war, most people don't think much about it. Not if, but when a major attack takes place, there are some companies that are going to be at the forefront helping to defend this nation and its individuals. There's money to be made in the preparations for such attacks and the above companies are key players.

Yours,

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ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, Lockheed Martin, Northrop Grumman, and Raytheon Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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