Ding Dong! Stay at Home Tech Stocks are Dead… Say What!
All too often, too much is made out of the daily gyrations in the stock market. Daily moves mean nothing to the long-term success of an investor.
Now, as we see the light at the end of the Covid-19 tunnel, a little too much is being read into some of the shifts that have occurred within the market.
We’ve been on record stating that the crisis will not truly be over until a vaccine is widely available. Little did we know how hyper-sensitive the market would be to developments, no matter how big or small, to the vaccine’s progress.
On November 9, Pfizer announced that its vaccine was 90% effective. The hope before this news was to have a vaccine with 50% effectiveness. It was good news for all of us when they announced the better-than-expected results.
The news sent stocks soaring, but there was more to the story, much more. Small stocks as measured by the Russell 2000, which had been struggling during the pandemic, gained 4.3%. A few individual winners delivered eye-popping returns especially in sectors like the travel industry.
Shares of Boeing gained 14% in one day of trading. Cruise liner Royal Caribbean zoomed 25%. Movie operator AMC was one of the biggest winners of the day adding 60%.
What was more surprising, or maybe not, were the losses registered amongst the big pandemic winners, the so-called stay at home stocks. For instance, the FANG stocks all lagged the market after the Pfizer news. Amazon and Facebook shares were down 5%.
The financial press was all over this. According to some, the tech stocks that have been doing so fabulously were deemed to be dead.
That theme continued for a couple of trading days.
Then on November 16, Moderna announced that its vaccine was tested at a 95% effective rate. How do you think the market reacted?
Once again smaller stocks in sectors suffering during Covid moved higher. Although the gains were not as impressive, the texture of the tape was the same. Tech companies were sold in favor of companies that struggled during the pandemic.
One explanation for these movements could be hedge funds and their complex trading programs.
Some of these quants, as they are known in the industry, are scouring the internet for keywords or phrases that suggest a trend may be in place.
Believe it or not, the instant a headline appears you can bet that some algorithm somewhere will trade on the news, and the vaccine news seems to be no different.
It may be generally true that a vaccine tips the scales in the market from one sector to another. However, the quants accentuate price movements knowing that the trading herd in places like Robin Hood will follow. Before the little guy places a trade, the quants are long gone with their profits.
We all know that there will be winners and losers as the pandemic ends, just as there have been winners and losers while the economy has been gripped by the virus.
However, what I see is that the market has already priced businesses most hit by the pandemic as though it had never happened. Recovery is already priced in. What you will now find is that many publicly traded businesses that suffered this past year are trading at prices close to where they were before the pandemic hit.
This tells me one of two things. Either the market feels these companies’ prospects are better now than they were nine months ago, or that these stocks are ahead of themselves.
This reinforces what we already know about finding value in the market. The best opportunities are found when the path out of a problem is still unknown. Once it’s obvious, it's already priced into the stocks.
So what are we doing? Assessing companies based on how they are positioned beyond the pandemic recovery. That is, looking for companies whose prospects for sustained growth extend well beyond the effects of this current crisis and its recovery. When viewed in this light, it’s hard to ignore the long-term prospects for many of the high-flying tech companies of the past year. Pandemic or not, many of these companies are just simply well positioned for long-term growth.
The more challenging job is identifying new trends that will emerge post-pandemic. That’s where the real opportunities will be found, but only if you identify them before they are obvious.