3 Stocks To Watch As Russia-Ukraine Situation Develops - We Are Watching CrowdStrike

Summary

• We discuss what investors should be watching as the Russian invasion gathers momentum.
• The market has turned to oil-related stocks and the dollar. But we discuss why investors should also consider tech stocks.
• We discuss why investors should watch CrowdStrike, TSMC, and Apple.
• I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Sundry Photography/iStock Editorial via Getty Images

Investment Thesis

As the battle unfolds in Ukraine, we must count our blessings as we are away from the conflict. But, we should also take time to remember people trapped in Ukraine, trying to defend against the Russian invasion.

Nonetheless, investors should also consider opportunities from the resulting volatility caused by Russia's military operation. The most apparent and crowded trade would be to add exposure to crude oil-related stocks or even long the dollar. But we think investors shouldn't shun tech stocks as well. The market volatility caused by the conflict has provided us with more opportunities to add exposure to tech stocks that could benefit from strong secular growth drivers. We discuss why we are watching CrowdStrike (NASDAQ:CRWD), Taiwan Semiconductor (TSM), and Apple (AAPL) closely.

How Has Russia's Invasion Impacted The Stock Market?

S&P 500 volatility index (VIX) (TradingView)

The sudden invasion of Ukraine by the Russian forces caused tremendous volatility last week. We can glean from the above that the S&P Volatility Index (VIX) reached a high of 37.8 last week. Furthermore, the Invesco QQQ ETF (QQQ) also went into a bear market momentarily. Investors/traders started selling rapidly into fear driven by the actions of Russian President Vladimir Putin.

Curiously, the QQQ recovered sufficiently that it even ended above the closing levels of the week before the invasion. Therefore, some analysts and strategists believe the market had already priced in the conflict before it started. JPMorgan (JPM) emphasized (edited): Risk aversion related to the conflict may already have peaked. Markets tend to overprice known unknowns, leading to the typical pattern of 'buy the fact.' While the scale of the invasion was worse than feared, the lack of a swift win for Russia likely lowers the likelihood of the conflict spreading.

Furthermore, Satori Fund Dan Niles suggested that the market tends to put aside military conflicts that are unlikely to affect the global economy. He articulated (edited): "If you look back at the market's behavior in 2014 when Russia invaded Crimea, or 2008 when Russia invaded Georgia, you will find that the market ignored both events. And the current conflict isn't going to be any different. Neither economy is big enough to affect the average company's outlook."

In addition, UBS Global CIO Mark Haefele also thinks that investor sentiments are poor, to begin with. He also feels that the macro conditions are conducive enough to energize a recovery subsequently. He added (edited):

We don't think this is a time to be outright negative on equities-investors' sentiments are already poor, at least some of the risks have been priced in. Also, a combination of above-trend global growth and falling inflation could quickly make the picture look more favorable for investors. (Haefele's LinkedIn)

What Stocks Should Investors Watch?

We believe that investors should capitalize on the opportunities afforded by the market volatility to add exposure selectively. Notably, we prefer to look for bargains in tech and growth stocks, given their significant value compression and weak sentiments. We highlight why we are watching CrowdStrike, TSMC, and Apple closely within that space.

The Russian-Ukraine conflict has thrown the impact and significance of cyber warfare into focus once more. Ukraine had experienced persistent cyber-attacks on government agencies and enterprise systems even before the Russian invasion. A week before the invasion, "institutions central to Ukraine's military and economy were hit with a wave of denial-of-service [DoS] attacks, which sparked an avalanche of headlines around the world. The strike itself had limited impact - but the larger implications for critical infrastructure beyond Ukraine are worth noting."

Then, a couple of days before the attack, a wiper malware was reportedly installed into Ukrainian government systems. The malware is equipped with the ability to "destroy files on infected Windows devices by corrupting specific elements of connected hard drives."

Therefore, it's imperative that governments and institutions globally pay attention to their cybersecurity systems' robustness. Furthermore, security specialists also opined that we may not have seen the worst of what Russia can do. Given the increasing extent of economic and financial sanctions levied on Russia, Putin could be forced to respond by retaliating with equal force.

CrowdStrike CEO George Kurtz even emphasized that most of the US security infrastructure is not up to mark in a recent CNBC interview. He emphasized (edited):

Governments and corporations 'have to be ready' because cyber will play a critical part in any modern war. Part of the challenge in cyber is there really aren't norms. So what happens with this escalation is really going to be interesting. Unfortunately, 85% of the infrastructure is owned by private companies, and when we think about that critical infrastructure, it isn't always up to the level we would like from a cybersecurity perspective. We've seen that with some of the pipelines. - CNBC

In a recent CrowdStrike article, we discussed that cybersecurity would continue to play a critical role as more workloads move to the cloud. But cloud security is still an evolving field. Furthermore, governments and corporations need to adapt to software-defined cloud-native architecture markedly different from the on-premise security environment they are familiar with. Consequently, it's critical that companies rely on the leading next-gen cloud-native cybersecurity leaders like CrowdStrike. CrowdStrike is the leading next-gen endpoint security leader in the market.

CrowdStrike's valuation has also been hit significantly by the rotation in growth stocks and SaaS stocks. However, its fundamentals remain robust. Furthermore, given the secular tailwinds underpinning cybersecurity, we believe that CrowdStrike could be a key beneficiary as governments and corporations review the adequacy of their current cybersecurity systems.

CRWD stock's price has increased by 12.5% (at writing) since our article was published. But we think the stock is still undervalued. We believe that the stock could be further re-rated as it rides on the cybersecurity impetus propelled by the Russia-Ukraine conflict.

The recent invasion has also impacted TSMC stock. The market has fully digested its post-earnings gains (we also discussed its recent earnings in an update). Investors were concerned whether China would move against Taiwan, as the US is distracted by Russia and Ukraine. The market was worried that China could be emboldened to invade Taiwan if Russia's military operation is successful.

However, Taiwan President Tsai Ing-wen is confident that she sees no immediate risk. She emphasized (edited):

I want to stress that the situation in Ukraine and in Taiwan Strait are fundamentally different, not only because of the natural barrier of the Taiwan Strait, but also Taiwan's geopolitical and strategic status. The public needs to be wary of any 'external forces' using fake information about Ukraine to cause panic about a possible threat to Taiwan. (Bloomberg)

Taiwan has often touted that its semiconductor industry led by TSMC is its "silicon shield." Furthermore, the world needs TSMC to survive, given its leadership as the world's leading foundry. Therefore, Taiwan has a critical position in global geopolitics. Therefore, we think the US will not "sit idly" and watch Taiwan get "unified" by China in the event of a conflict. Besides that, Europe could also be spurred into action, given its dependence on TSMC. Therefore, Beijing would need to carefully make these calculations to consider taking Taiwan by force, given the current circumstances.

In addition, Chinese President Xi Jinping was said to be focused on domestic politics this year. Bloomberg reported (edited):

Taiwan believes Xi Jinping is too focused on a key party meeting to extend his tenure as China's leader to take military action now, regardless of what happens between Russia and Ukraine, according to two senior officials involved in security issues in Taipei. (Bloomberg)

Therefore, we believe that investors should capitalize on any weakness on unfounded fears about Taiwan to add exposure to TSMC.

Finally, we would like to reach out to Apple Inc. (AAPL). Apple has been riding on robust momentum since releasing its earnings in January. It demonstrated that the Cupertino company has continued to gain significant traction with its iPhone 13.

Apple has been very successful with its 5G product rollout, starting with iPhone 12. Furthermore, it has also gained significant share in its Mac segment, outperforming the industry. Furthermore, the Cupertino company is ready to launch its iPhone SE 5G in March, further extending its 5G rollout to more affordable devices.

Therefore, we believe the company is still very early in its 5G smartphone momentum, as it looks to build up its 1.8B installed base further. Moreover, the company has also continued to gain traction in its widely diversified services segment. Advertising should continue to see strong momentum as Apple rides on the tailwinds from its IDFA changes.

Furthermore, the recent market volatility has also impacted AAPL stock. But, we believe that investors should make full use of the volatility to add high-quality stocks like AAPL. CEO Tim Cook & Team have proven their world-class execution capability and shareholder-friendly policies.

Even Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett praised Cook in his annual letter released on Saturday. He said:

It's important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports - and last year, Apple paid us $785 million of those. Yet our 'share' of Apple's earnings amounted to a staggering $5.6 billion. Much of what the company retained was used to repurchase Apple shares, an act we applaud. Tim Cook, Apple's brilliant CEO, quite properly regards users of Apple products as his first love, but all of his other constituencies benefit from Tim's managerial touch as well. (Berkshire Hathaway)

Bottom Line

We will be watching all three stocks closely and encourage investors to do the same. You can consider adding all three if you have the appetite for market volatility as the Russian invasion unfolds. But, if you ask us to choose one, we would select CrowdStrike.

We believe that cybersecurity will be sharply in focus. Russia could potentially step up its cyber warfare in retaliation to the sanctions imposed to hobble its economy. Even the largest US banks are worried, as CrowdStrike CEO Kurtz highlighted, despite these banks having "mature cybersecurity technology." But, Kurtz also reminded us why cyberwarfare is so perilous and challenging to combat. He emphasized (edited):

I've talked to a lot of banks recently, a lot of senior executives, and they're concerned. They're very concerned about what might happen here, and they should be. Due to the widespread consequences that so-called wiper viruses can have. They are designed to basically wipe a system. When we think about cyber, it has no boundaries for collateral damage. - CNBC

Therefore, CRWD stock is our top pick among the three.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CRWD, AAPL, TSM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.