A Cyber-Offensive Strategy for Your Portfolio Amidst Tech’s Bear Market
As world markets fall through the floor, global attention has been riveted on the Russia-Ukraine conflict that devolved into full-blown warfare last week after months of buildup. While columns of Russian tanks and ballistic missile strikes have dominated the news cycle, non-kinetic dimensions of the conflict have garnered significantly less attention. Probably the most notable example of non-kinetic conflict raging across Europe is a major uptick in cyber attacks being perpetrated by state and non-state actors alike. Weeks ago during the buildup, Ukrainian banks and government sites were taken offline during massive DDoS attacks; an oil loading facility at a Dutch port was also taken offline for a matter of days showing the spillover of the conflict into critical infrastructure/civilian industries.
Last week just hours before the Russian invasion, Ukrainian authorities announced the detection of another massive wave of cyber attacks targeting both military and civilian digital infrastructure. In addition to a broad-spectrum DDoS, Ukraine was hit with a sophisticated “wiper” malware that bore a December 2021 timestamp, hinting that the bug was specially designed for a cyber offensive against specific Ukrainian assets. Once tanks began rolling across the border on Thursday, cyber conflict has continued as both sides take pot-shots at each other.
In other words, the trajectory of the Russia-Ukraine conflict to date has showcased the highly sophisticated and damaging cyber offensive capabilities wielded by a fuzzy amalgam of state and non/semi-state actors. At the same time, we’ve been witnessing the hugely bearish impact fighting in Europe is having on global markets. Zooming in on tech, the NASDAQ composite index is down nearly 14% YTD, with lesser though still-notable declines in the DOW and S&P500. Meanwhile, the meme stock space that was so dynamic in 2021 has taken a round beating, with many postulating the death-knell of its entertaining though wild and ultimately bearish run.
So where does that leave tech investors reeling to recoup losses? I count myself as a member of this crowd, and have taken the following steps as a way to make a buck of just stay afloat during this epic run of the (Russian, pun intended) bears:
The conservative approach: buy the dip. But a big caveat here–I’m not talking about the dip on TSLA or your favorite cannabis pennystock. I’m talking about buying the dip on slow growth, low risk mutual funds/Index-based ETFs/sectoral ETFs. For instance, now would be a great time to establish/beef up a position in QQQ, SPY, or well-known and high-performing mutual funds like SFNLX, IRLNX, VWNFX, or FXAIX. As Warren Buffet is famous for advising, “for most people, the best thing to do is to own the S&P 500 index fund.” The man ain’t wrong– most amateur/retail investors just won’t beat the market, and definitely won’t beat market whales equipped with Bloomberg terminals. Particularly in a time of rising inflation, investing in stable, low-risk ETFs/Mutual Funds is the best way to beat inflation while hedging losses in an overall bear market.
The speculative approach: go in on higher risk though potential higher-reward cyber stocks that have serious growth potential for the intermediate to long-term time frames. For investors that believe in the power of sectoral momentum and disruptive tech, establishing positions in a select number of strong cyber security companies could be a way to ride a macro-trend for multibagger potential. I’ve identified three cybersecurity stocks (2 on NASDAQ, one listing on NASDAQ via SPAC in coming months) that I’ve been following with extra vigilance of late to expand my current positions in the sector. They are:
- Palo Alto Networks (PANW) popped nearly 10% on Friday driven by over 300% average trade volume as the market responded to Russia’s ongoing cyber aggression. PANW is an old favorite; trading at $570 with a >$50B market cap, this pick has been a solid growth play for years. At last report, Palo Alto was generating cash profit at the rate of $1.4 billion per year, valuing the stock at only about 34X its free cash flow which is qualified by the fact that the company is growing at a rate of 30% annually. I’m glad I’m already in PANW to benefit from this bullish behavior, and strongly recommend this as a potential pick for others who see LT potential in the cyber sector moving forward.
- Fortinet (FTNT) was also up 9% on Friday after an impressive bounce over the course of last week as things began to get white-hot in Europe. FTNT is similar to PANW in that it’s a bread-and-butter stock for cyber security holders, currently valued at $325. A few weeks ago, FTNT announced that it had outperformed its earning forecasts in Q4, with quarterly earnings of $1.23 per share, beating the Zacks Consensus Estimate of $1.14 per share. This compares to earnings of $1.06 per share a year ago and represents an unexpected 8% quarterly growth in revenues. With an average BUY/HOLD analyst rating, multiple recent upgrades to “overperformed”, and a price target of $363, FTNT is a solid play to boost your cyber portfolio.
- HUB Security (HUB.TA) is a Tel-Aviv listed confidential computing company that is slated to list on NASDAQ later in ’22 via SPAC. The company has apparently raised >$150M in anticipation of the listing, and just last week announced the closure of a private placement with Israeli investors for a sum >$10M. Trading at 507ILA, HUB is +32% YTD and has far outperformed both PANW, FTNT, and market indexes like QQQ. HUB’s impending NASDAQ listing in expected to serve as a significant value-multiplier (8–12X) for shareholders, meaning that current holders could be holding one of the exchange’s hottest new cyber security offerings in a few months time. I recommend adding this ticker to your watchlist, and for those with access, to consider establishing a preliminary position.
Before signing off, its important for me to reiterate that the strategy I’m outlining above is two-pronged, and is meant to spread around risk while allowing for some more speculative plays in well-established though singular equity investments. I’ve got the majority of my loose change in mutual funds/ETFs, but going in on specific, well-researched companies in what I see as disruptive sectors is another way to boost earnings in the short-term while not going overboard in terms of portfolio risk.
The bottom line remains that in this brave new world of great-power conflict that is being waged between state actors, cyber warfare will continue to play a key role. This fact goes for both public sector and also private sector actors, as cyber targets’ weak spots are often exploited via civilian-use code/applications. By 2025/2030 the value potential of corporate cyber defense should be much better appreciated, so until then now is the time to make early moves. Otherwise trade responsibly, don’t panic sell after a few straight days of red, and DYOR–I’m not a financial advisor.