The start of this week looked like the end of the road for tech stocks.
As Joe Biden was declared the winner of the presidential election and Pfizer announced a COVID vaccine trial that was 90% effective, the narrative of a massive rotation into value emerged.
And indeed, when the stock market opened up Monday morning, the Russell 2000 index of small-cap and value stocks was up over 7%. All the unloved stocks from the past months since COVID began – energy, transport, and financials – were suddenly hot.
And by the end of the day, one thing was clear: tech stocks were not. Anything with a tie to the “stay at home” environment got dumped.
The day marked a huge rotation out of growth and into value stocks. The market said: “Get your head out of the clouds and into value.”
But today, I’ll show you why the market got ahead of itself… and is at risk of missing the bigger, more profitable picture.
Jumping the Gun
The news of Pfizer’s potential vaccine lit a fire under value. But here’s the thing… the vaccine isn’t even FDA-approved yet.
And even if it gets that far, the drug is a logistical nightmare. It needs to be stored at -700 Celsius. Most medical facilities aren’t equipped for that, at least not at scale. And even if they were, the vaccine must be administered in at least 2 or 3 stages for each patient.
We also have to ask this question: Who gets it first? Frontline medical workers and other essential workers will likely be first.
So, even if the drug is rushed through approval and somehow widely distributed on the fastest schedule imaginable, it’s not something the general public will have anytime soon. In fact, with cases and hospitalizations surging, the more likely scenario is another lockdown.
That means all the stocks people loved on Monday – like airlines, online travel, energy, and financials – still won’t make any more money for at least a few quarters.
Folks, this big rotation is premature. And to me, it screams of hedge funds scrambling to cover their long-growth positions and go big into value.
But once reality sets in, tech and growth stocks will quickly come back in vogue. And I have my eye on one particular subset of these sectors… which I think will be one of the best investments of 2021.
What a Vaccine Won’t Change
I’m talking about cloud computing businesses. These are the businesses that host data storage of services “in the cloud” (really, on massive racks of servers).
Through this pandemic, we’ve all become increasingly reliant on the virtually unlimited storage, syncing, and remote work capabilities offered by cloud services.
So, think about this… Just because a potential vaccine is announced, does it mean it’s the end for cloud computing? Will you suddenly stop working remotely? Will you suddenly stop using cloud storage?
I doubt it. In fact, I’d argue our reliance on cloud services will only intensify after this pandemic is behind us.
Just think of everything that’s coming down the technological pipeline…
We all already stream our favorite shows and movies in high-definition. All that programming is stored on cloud servers. Soon, with the onset of 4K and even 8K televisions, all this high-definition programming will grow in size… and demand more cloud storage.
Then there’s the incoming 5G mobile networks, which will only intensify data consumption and storage. As that network rolls out, we’ll need to store and access ever-larger files. The cloud will need to grow to accommodate.
So, when a sudden stock market rotation comes and cloud stocks get smoked, you need to remind yourself that they are companies, not just tickers. They’re businesses that grow earnings through higher revenue and profits – a winning formula regardless of their industry.
Buying great businesses that make a lot of money and will likely continue to do so is a long-term recipe for success. The investors who rushed into embattled sectors like energy, financials, and transport clearly forgot this.
So… when a bunch of professional investors are forced to dump tech stocks, should you be running away? Or should you be ready to buy the best ones at a deep discount?
History says the latter is the way to go. And here’s a good way to play it…
A Winning Trade, Vaccine or Not
We can define cloud services stocks as companies that generate a portion of revenues from:
- online subscriptions (software-as-a-service or SaaS)
- online software apps (platform-as-a-service or PaaS)
- virtual computing infrastructure (infrastructure-as-a-service or IaaS)
- data and server storage facilities
- infrastructure and hardware used in cloud and edge computing
These types of businesses are a great place to start your search. But for those looking to spread their risk around the sector, there are a couple ETFs to take a look at.
The Global X Cloud Computing ETF (CLOU) holds companies that make 50% or more of their revenues in activities listed above.
And for a higher-growth focus, look to the WisdomTree Cloud Computing ETF (WCLD). It requires that any new stock in the ETF have revenue growth rate of at least 15% for the past two years. And any current holding must have grown 7% in at least one of the past two years.
Big money loved cloud computing stocks all year… and suddenly fell out of love with them on Monday.
But don’t get carried away with the rest of Wall Street and think the cloud is done… It’s only just begun.
Right now might just be the time to buy these incredible businesses on discount – not get swept up in short-term, market-moving narratives.
Patience and process!
Editor, Palm Beach Insider