A new day, a new round of AI disruption...
On February 20, Anthropic released a new tool in its Claude AI model. It allows users to scan software code for vulnerabilities and even suggests fixes.
Before this, cybersecurity seemed like the one area that might escape AI's destruction of the software industry. But now, folks are rethinking the safety of these businesses.
The entire cybersecurity sector fell on the news. And one of the biggest players crashed 17% in the two trading days after the release.
This decline might have been too much, too fast, according to one indicator. And if AI doesn't end cybersecurity as we know it, history shows this is a massively profitable setup.
CrowdStrike Could Rally After This Rare Sell-Off
CrowdStrike (CRWD) is a heavyweight in the cybersecurity business. Ever since the company went public in 2019, it has dominated its competition.
The stock is up nearly 1,000% since its IPO... a staggering 42% per year.
Now, though, investors fear that Anthropic's tool – which won't be the last of its kind – could change cybersecurity as we know it. Investors didn't waste any time before selling CRWD shares in droves.
That pushed CRWD to a rare setup based on the relative strength index ("RSI"). This indicator looks at recent price action for a stock to see whether it has moved too far, too fast in either direction.
An RSI below 30 marks an extreme amount of selling. That makes a snapback rally possible. And in CRWD's case, we saw an RSI of 22 last month. Take a look...
CRWD has been an incredible winner over the long term. But it has taken a beating. It's down 33% since last year's high. And the recent fall triggered this rare RSI setup.
To test similar situations, I looked at each unique instance with an RSI of 25 or less. We've seen four similar setups since 2019. And they were all incredible opportunities to put money to work. Take a look...
With annual returns of 42%, CrowdStrike is one of the best investments you could have made since 2019. Heck, it has even outperformed bitcoin over that period. But you could have done even better after extreme sell-offs like we saw recently.
Similar instances led to gains of 26.2% in three months, 32.3% in six months, and 75.7% over a typical year. That's major outperformance, even compared with CrowdStrike's massive buy-and-hold returns.
Of course, this opportunity will only be profitable if AI doesn't upend the cybersecurity industry. But no one knows for sure whether that will happen. Regardless, history shows that the recent sell-off is overdone.
This situation is worth keeping on your radar. Once the pain stops and the trend reverses, CrowdStrike could see major gains.
Good investing,
Brett Eversole
Further Reading
The carnage in software stocks has been all over the financial media recently. But while the industry is struggling, it's not all bad news for the sector. In fact, the recent sell-off provides the perfect buying opportunity for software's hidden gems.
"Business models aren't as black and white as they seem," Rob Spivey writes. When it comes to picking stocks, finding the ones that can beat the market is a three-step process. The third step is most important for finding stocks on a one-way trip higher – but it's also the step investors struggle with most.