In 1999, security industry stocks had a Dickensian kind of year—some incredible highs were mixed with disturbing lows. However, in 2000, the “best of times” portion of Dickens’ famed opening to “A Tale of Two Cities” was removed from the equation as security stocks encountered a deep drop across much of the industry.

Security high-tech stocks paced the industry’s 2000 meltdown on Wall Street. Mirroring the year’s 39-percent plunge of the NASDAQ index, many computer security, biometric and asset-tracking companies saw their values evaporate as investors lost faith in the new technology boom.

The NASDAQ had its worst year since it was created in 1971, while the Standard & Poor’s 500 stock index dropped 10.1 percent and the Dow Jones fell 6.2 percent.
With flat holiday sales, a sharp rise in workforce reductions, an increase in unemployment claims, plummeting auto sales and a surge in heating costs, the mood at the end of the year was somber—and many security stocks tumbled further.

Computer security stocks—joined at the hip with Internet and dot.com stocks—were among the hardest hit. For example, during the last week of the year, one of the sector leaders, Network Associates (NASDAQ/NETA), announced it would have a dramatic revenue and earnings shortfall for the December quarter. Its stock plunged 65 percent that day.

In 1999, the computer security sector registered a whopping average return of 214 percent. However, 2000 was payback time—36 computer security companies listed in the Mallon Global Security Stock Index averaged a dismal return of -41 percent.

Other sectors on the Mallon Global Security Stock Index recorded similar tales of woe. The depressed private corrections sector was down 44 percent for the year, while the categories of asset surveillance/location technology and CCTV/video products dropped by 38 percent and 31 percent, respectively.

Despite all the gloom and doom, there were a few bright spots. Paced by a few big gainers, the alarm equipment and bomb/drug detection sectors recorded slight respective upticks of 19 percent and 17 percent.

The top 10 security winners for the year came from a variety of sectors, including computer security. Two companies in that volatile sector bucked the trend to register impressive stock gains for the year.

3 Stock Leaders Boast 100-Plus % Gains

The top stock performance company in 2000 was Israel-based Check Point Software (NASDAQ/CKP). The company’s stock soared 169 percent, despite the collapse of the computer security sector together with the Internets, dot.coms and other high-tech firms. Check Point is a global leader in providing antivirus software for corporate networks. 
One of the things that makes Check Point a standout in the computer security marketplace is that it actually makes money—lots of it.

Established Product Manufacturers Place Next

Detection Systems Inc. (NASDAQ/DETC), which was prodded into a sale by a bitterly fought proxy battle, saw its stock appreciate at the end of the year, when it received an $18 a share bid for the company from a German suitor. This boost left Detection System’s stock in fourth position at the close of 2000, boasting a gain of 89 percent. Companies From Varied Sectors Round Out Top 10

Choicepoint (NYSE/CPS), the investigative and background checking firm primarily serving the insurance industry, ranked seventh, with stock appreciation of 58 percent in 2000. The company, which started as a spinoff of Equifax (NYSE/EFX) in 1997, commands a hefty P/E multiple of 60 and sells at six times book.Jack Mallon is founder and principal of Mallon & Associates in New York, an investment banking firm serving the global security industry. He also publishes Mallon’s Security Investing, a monthly financial newsletter on investment opportunities in the global security/crime control industry.

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