“Then the bowsprit got mixed with the rudder sometimes:
A thing, as the Bellman remarked,
That frequently happens in tropical climes,
When a vessel is, so to speak, “snarked.”
― Lewis Carroll, The Hunting of the Snark
If there’s one thing certain in this life, it’s the tendency for things to go unexpectedly wrong. (In the case of The Hunting of the Snark, pretty much everything does.) World War II airmen blamed gremlins for unexplained mechanical problems; today’s computer wizards blame bugs – and, in fact, an actual bug was the origin of the term.
In today’s world, where our machines not only form a big part of our lives, but actually talk back to us, data breaches are perhaps the biggest problem. These occur because it’s as difficult to protect data from hackers as it is to keep squirrels from the bird feeder. A new study suggests that, although it doesn’t make up for having your identity stolen, you may be able to make money from data breaches.
The study, by Paul Bischoff of comparitech, looked at the share prices of 28 companies on the day a large data breach (1 million or more records leaked) was disclosed. The study encompassed 28 companies and 33 breaches. Share prices fell, on average, 7.27% in the 14 days following the breach, and underperformed the tech-laden Nasdaq 100 index by 4.18%.
Not surprisingly, finance and payment companies were hit hardest by data breaches, and the more sensitive the data, the bigger the drop. Those companies were: JP Morgan Chase, Heartland Payment Systems, Countrywide, Global Payments, Equifax, Capital One, and First American Financial. Their stocks bottomed, on average, 16 days after the breach and suffered a 16.7% loss. (Equifax, the poster child for data breaches, straggled back briefly to its 2017 pre-breach high just this August).
The most aggressive way to play a data breach would be to short the stock of the company that has had the breach. (When you short a stock, you borrow shares from your broker, sell them, and hope to repurchase them at a lower price.) It’s risky: A stock can only fall 100%, but there’s no limit to how far it can go up.
A somewhat less aggressive tactic would be to buy the shares a few weeks after the breach, because they typically bounce back and actually outperform the Nasdaq by a modest 0.48%. After about a month, share prices typically rebound and catch up to Nasdaq performance, the study claims. If you were interested in the stock before the breach, the gremlins could give you a chance to pick it up a bit cheaper.
Bear in mind that data breaches may make you rethink your opinion of the company. Most companies will suffer a data breach at some point in their history. A company that suffers repeated breachs may be – to use a technical term – snarked.