The stock market has experienced some wild rides since the beginning of the COVID-19 pandemic. We saw a crash in 2020 and a subsequent rally that currently put us at an all-time high in the indices. Almost a year and a half since COVID came to America and there are big questions surrounding what stocks will outperform into the end of the year.
While life is almost back to normal, the market is in a confusing spot. Tech stocks were thriving during the pandemic, but started to see weakness when the vaccines were rolled out. Money then rotated into the reopening of stocks like airlines, hotels, restaurants, and cruise lines. This created a divergence on some trading days that would separate the performance of the Nasdaq and S&P by as much as 1%.
Looking Past Divergence and into the Future
As we put the pandemic in the rear-view mirror, investors are now looking at the longer-term potential in specific sectors. Many of the “COVID stocks” have fallen from their peaks, but continue to perform fundamentally as we transition into a fully reopened economy.
This means that the recent divergence has created tons of opportunities as the COVID names continue to see tailwinds from a permanently changed economy. Below we will discuss three areas that were hot during COVID, but have seen sell offs since the vaccines were rolled out. We will then dive into some stocks that reside within these sectors that will continue to outperform in the future.
1) Technology
We all know the big names that did well during the pandemic. Companies like Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Netflix (NASDAQ:NFLX), Apple (NASDAQ:AAPL) and many more saw record revenues as people were dependent on their technology to continue living life and doing business.
Many tech companies saw exponential growth over the last year that they were not expecting for another 10 years. The pandemic accelerated tech into the future and we are now living in a permanently changed environment because of it.
The technology ETF XLK took a 33% dip during the COVID crash. However, it quickly bounced back to all-time highs in June of last year and is now up over 113% from those COVID lows.
Let’s go over two stocks that became household names over the last year and continue to do well post-COVID.
ZM- Zoom Video is a communication platform that helped a lot of families and businesses connect during the pandemic. The company saw parabolic growth during COVID, seeing three straight quarters of triple digit EPS beats in 2020. While growth has slowed, the company continues to crush expectations, with an EPS beat of 36% in early June.
The stock rose from $65 to $588 in 2021, but started to pull back in November, right when the vaccine news hit. The stock pulled back 53% from highs, but is up 37% from the recent lows.
The company is valued at $110 billion and pays no dividend.
DOCU- DocuSign (NASDAQ:DOCU) provides e-signature solutions and has become popular with users in real estate, insurance, healthcare, government and more. When people couldn’t get together to sign documents, they took care of business online with DocuSign.
The company saw a breakout quarter last year, beating EPS by 142% back in September. The earnings momentum continues as the company has reported three straight beats on EPS of over 60%.
The stock was up almost 200% in 2020, but pulled back over 35% from highs. After the recent quarter, investors seem to be accepting that the company’s momentum is not stopping anytime soon. The stock is back at all-time highs as DocuSign is now valued at $54 billion.
More . . .
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2) Consumer Staples
This sector comprises the goods and services that are necessities, which often do well during recessions. However, the COVID outperformance stemmed from stay-at-home orders, which led to panic buying of food, toilet paper and almost anything in a grocery store.
The main ETF for this sector is XLP, which bounced 45% from the March 2020 lows to November highs. The sector has seen some selling of late, but is only 4% off its highs.
Let’s go over two leaders in this group:
PG- Proctor & Gamble is a household name that sells many of the products in your home. Toilet paper, shampoo, deodorant, razors, toothpaste and diapers are all products we buy from P&G.
The company reported a 15% beat on EPS in July of last year, the major COVID quarter when people panic bought everything on the shelves. However, the company is still outperforming, with beats on EPS of at least 6% every quarter since that big July number.
The company, valued at $330 billion, pays a 2.5% dividend. The stock is 8% off its 2021 highs.
WMT- Walmart (NYSE:WMT) is a popular brick-and-mortar store, but in recent years has expanded into e-commerce, which helped them during the early stages of COVID.
The company reported a whopping 28% EPS beat last summer, but topped that with a 38% beat this past May. This shows continued momentum with the $388 billion company that also pays a 1.5% dividend.
3) Camping
There was a lot of fear surrounding travel at the height of the pandemic. Because the U.S. had one of the highest cases counts, some countries issued quarantine rules for travelers. This wasn’t appealing for someone on vacation so we saw a big uptick in domestic travel. And since all the hotels were closed, the demand for RV’s and the desire to camp increased.
While America has opened up, the demand for camping is still there as we head through the summer months. We have already seen evidence of this when two of the RV manufacturers recently reported earnings.
THO- Thor Industries (NYSE:THO) is the largest manufacturer of RVs in the world. Some popular brand names include Airstream, Jayco, and Keystone.
The company saw a lot of success in 2020, including a 200% beat on EPS in June of last year. More recently, the company is coming off a 39% EPS beat, as well as an order backlog of $14 billion. The only issue for Thor is making the RVs fast enough, which has led to a 30% slide in the stock in Q2 of 2021.
The stock went from $32 to $152 last year, so you can’t blame investors for taking profits. However, the demand for RVs is the strongest it’s ever been, which has the company valued at $6 billion. Investors also can collect a 1.5% dividend if they jump into the recent sell off.
WGO- One of Thor’s biggest competitors is Winnebago. The company is valued at $2.3 billion and has strong brand recognition after being around for sixty years.
Winnebago is smaller and only pays a 0.7% dividend, but a recent EPS beat of 23% caused a turnaround in the stock. After falling over 31%, the stock is now almost 10% off its lows.
In Summary
The questions surrounding the “COVID stocks” will lead to continued volatility. This will create opportunities that will allow entry points at discounted prices. If investors focus on the stocks that are both fundamentally and technically strong, they will be rewarded with outsized returns.
How to Capitalize
The current atmosphere is not your typical stock trading environment. The Fed is about to start the tapering talk and the reopening trade is largely priced in. This combination could cause outsized earnings moves.
The opportunities during this earnings season will be plentiful due to the recent volatility. The mission of our portfolio, Zacks Counterstrike, will be to catch these big moves, playing both the long and short side of the market.
I plan to be in before and after earnings depending on the situation and look forward to capturing the big moves that are coming our way. The upcoming quarter will be important for stock prices, join me and let’s profit from it!
Our goal: Quick and consistent profits.
For example, we recently closed gains of +40.2%, +49.1% and +62.0%. One even closed at a remarkable +252.0% in less than a month.¹
Plus, on Monday morning I'm planning to add two new stocks that are primed to sweep upward and you can be among the first to catch their full profit potential.
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Happy Trading!
Jeremy Mullin
Editor of Counterstrike
Jeremy Mullin is a stock strategist who combines the fundamental power of the Zacks Rank, technical analysis and computer driven trading to find the best trades. Discover all of his current recommendations in the Zacks Counterstrike.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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