We are living in a virtual age where engagement, interactions, and entertainment are primarily accomplished through a digital screen. The stay-at-home initiative has accentuated the world's reliance on digital technology. The ease & convenience that technology has provided the world amid this global pandemic is conditioning society to depend on it. The innovation-driven companies that have been provided with an unlikely tailwind during this pandemic are catalyzing a growing spread between tech stocks and the broader equity market.
The Nasdaq 100 index, which is primarily driven by tech stocks, has outperformed the S&P 500 by more than 15% thus far in 2020 (illustrated by the TradingView chart below).
The post-pandemic world will be defined by shifting consumption patterns, which the equity markets have already pricing in. The virus is having a disproportionate impact on industries across the economy.
Disproportionate COVID Impact
The stay at home order is hitting retail, airlines, banks, and Main Street businesses the hardest. Department retailers like Macy's (M - Free Report) , Kohl's (KSS - Free Report) , and JC Penney JCP didn't recover from the market's initial crash earlier this year and may never recuperate. Digitally-driven shopping is replacing the seemingly antiqued brick-and-mortar storefronts.
Airlines such as Delta (DAL - Free Report) and American Airlines AAL have gotten obliterated, with air travel traffic going from more than 2 million passengers per day to less than 100,000. It could be years before traffic reaches its pre-pandemic levels, and these shares have reflected this grim outlook.
Main Street proprietors of local restaurants and bars are hoping that the federal government will keep their small businesses and employees afloat. As of now, it does not seem like enough is being done for that to happen. Some analysts are estimating that more than 40% of small businesses could fail because of COVID-19. Congress is now in the process of passing another $3 trillion in stimulus which they hope
A wave of bankruptcies is on the horizon for these private companies. These businesses are not represented on stock exchanges, which means that their bankruptcies will not directly impact your portfolio, but the employment loss will negatively impact demand across sectors.
Tech giants like Amazon (AMZN - Free Report) , Microsoft (MSFT - Free Report) , and Facebook (FB - Free Report) have been driving the stock market's rally since the end of March. Many well-positioned tech companies are actually benefiting from this health crisis.
With every failed brick-in-mortar retailer, e-com giants Amazon (AMZN - Free Report) and Alibaba (BABA - Free Report) expand their market size. These two companies are also leaders in the fast-growing cloud-computing market in their respective regions, giving them a double-edged sword in these highly uncertain times. AMZN shares are relentless, hitting all-time highs a couple of weeks ago and closing in on them again despite the broader equity market downturn. AMZN is too expensive for me to consider right now, but if the stock were to fall below $2,000, I might look buy.
BABA has experienced substantially less volatility than the broader market, and I see this stock as an attractive buying opportunity at its current price point (below $200). Alibaba controls the e-com and cloud computing segment in the most populous country and soon to be the largest economy in the world. Yet, it is valued at half of its less profitable competitor, Amazon.
Some other notable benefactors of COVID-19 include home fitness frontrunner, Peloton (PTON - Free Report) , and well-positioned video call business Zoom (ZM - Free Report) . Both of these stocks have boomed since the beginning of the year. ZM appreciated over 140%, and PTON has seen gains of over 50% in 2020. I wouldn't touch either of these stocks at their stretched valuations, but it provides an excellent example of how the pandemic has positively impacted well-positioned businesses.
When looking at future investment opportunities, focus on companies that you believe will come out of this market slowdown stronger than ever. I like tech because it is a clear-cut beneficiary of this virus, but there are many others. Big box retailers like Home Depot (HD - Free Report) , and Walmart (WMT - Free Report) are some of the few places that have remained open and have become staples for many consumers. Healthcare will also likely experience positive long-term effects from this pandemic.
Before investing in a stock, ensure that the company is well-capitalized to weather this pandemic, has a compelling product offering that will remain a necessity in the post-pandemic world, and has not experienced an excessive valuation run-up like PTON and ZM.
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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