Two Ways to Profit from the Home Depot Data Breach

Want to profit from the Home Depot data breach? Look to identity theft protection services and data security companies. Here are two.

Unless you’re one of the hackers who stole 56 million credit & debit card numbers from one of America’s most beloved home-improvement stores, you might think it impossible to profit from the Home Depot data breach.
Home Depot’s (NYSE: HD) breach is bigger than Target’s (NYSE: TGT) breach last year but smaller than the data breach that was discovered in 2007 at TJX (NYSE: TJX), operator of TJ Maxx and Marshalls.
So how can one profit (legally) from the Home Depot data breach? I have two strategies to share with you today. But I certainly wouldn’t recommend shorting Home Depot.
It appears that the breach took place over many months and in the face of warnings about holes in Home Depot’s data security systems. It also appears that the hackers exploited the same security hole used in the Target data breach, a weakness in the operating system used at Home Depot’s point-of-sale systems.
That operating system, believed to have been in place since as far back as 2002, is a version of Microsoft’s (Nasdaq: MSFT) Windows ME.
“ME” stood for millennium edition. The new millennium began 14 years ago. What this tells me is that Home Depot either did know better or should’ve known better.
That said, Home Depot will almost certainly be on the hook for losses to consumers. But this number isn’t likely to have a huge impact on Home Depot, $123.8 billion corporation regarded by most as the best-of-breed among home-improvement retailers.
For its part, Target has acknowledged about $146 million in costs associated with its data breach, most the result of settling consumer claims filed by payment networks.
Even if Home Depot’s data breach costs the company $500 million, the loss would still only represent about 0.4% of Home Depot’s market capitalization. As such, I don’t expect even my extreme estimate of data breach related costs to affect the company much.
But there are certainly ways to profit from the data breach.
Recently I have recommended LifeLock (Nasdaq: LOCK), a company that sells identity theft protection to consumers. The company’s product is essentially “identity theft insurance,” with LifeLock promising to monitor accounts and reimburse up to $1,000,000 in identity theft related losses.
The stock is actually down for 2014, though this isn’t too surprising after it rose 104% in 2013.
I still like LifeLock as a way to profit from the general trend of data breaches becoming more commonplace and consumers seeking protection from identity theft.
But I think the Target and Home Depot data breaches call for a different tactic.
Clearly Target and Home Depot have a huge problem with outdated point-of-sale and data security technologies. And I think many major consumer-facing companies will join them as they invest heavily in these areas.
That’s part of the reason why shares of Palo Alto Networks (NYSE: PANW) are up 9% since the Home Depot breach was first announced and almost 70% so far this year.
The company isn’t tiny, with a market capitalization of $7.81 billion. But without turning a profit since its 2012 initial public offering, the company is very much still speculative.
In its most recent quarterly earnings report the company announced 59% revenue growth compared to the same quarter last year, surpassing its already-lofty guidance of a 41% to 44% increase in revenue.
Over the past year the company has reported a net loss of $226.5 million, though $160 million of that loss was directly related to legal settlements with competitors.
Considering its relatively small market share – $600 million – in an addressable market estimated to be around $16 billion, the company’s heavy investments in sales and marketing are likely to pay off handsomely.
This is certainly a stock I’ll be watching closely for consideration for my own portfolio in this brave new world of cyber crime and data theft we’re witnessing again and again. The Home Depot data breach wasn’t the first and it certainly won’t be the last.

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