COVID-19 Crash or Market Smash? Sentiment Favors the Giants

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

There is a lot of debate on Wall Street right now about whether this is truly the worst of times or whether the transition to post-pandemic greatness is already underway.

The bears argue, quite rightly, that it’s hard for stocks to credibly break a lot of records when the economy is still trying to shake off the deepest recession in recent memory. After all, 40 million people have lost their jobs, and more layoffs are coming.

We are staring in the face of a 40% profit decline this quarter across the S&P 500. Under normal rules, that would suggest that stocks now trade at an uncomfortably rich 22X earnings and we probably won’t see real growth before the first-quarter 2021 numbers come out next year.

But not all stocks are in that 40% tailspin. Many are holding up much better than the market as a whole and are giving investors a pleasant enough ride to make the COVID-19 outbreak recede from memory.

These investors are the ones who can make a compelling case that this is the best of times and that these are the best of stocks. For them, in their world, the bullish view already has triumphed.

As with so much else, it all depends on whether you are focused on “the market” or on picking the right individual stocks to make money in any economic environment.

Pick Five Stocks and Win

Every week, I discuss the up-and-coming winners on my “Millionaire Makerradio show. We’re all about finding companies with what it takes to become giants in the emerging post-COVID-19 economy. (Click here for recorded episodes and local stations.)

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This has meant that baby biotech stocks, as well as online retail names like Chewy Inc. (NYSE:CHWY) and Shopify Inc. (NYSE:SHOP), emerging consumer brands like Alkaline Water Co. Inc. (NASDAQ:WTER), social media kingpins like Sprout Social Inc. (NASDAQ:SPT) and so on.

These stocks have soared over the last few months now that the hot spots of the new economy are clear. We know what America will look like after a pivot toward curbside pickup, home delivery and healthier lifestyles.

But these are all still tiny companies that are early in their evolution and are much closer to a ground floor than an absolute ceiling. They have a lot of room to keep soaring now that they’ve achieved critical mass.

Bigger market rockets, on the other hand, are leading the way because their businesses are simply too massive to come to a sudden stop. For them, critical mass means that they can keep moving through any disruption short of an absolute catastrophe.

And as it happens, the five biggest stocks around have determined whether the last six months have been stagnant or satisfying for investors. If you purchased shares in these giants, you’re happy. If you shunned them, you’re probably sad.

You know their names. They’re the “FAAMG” group, better known as the established “FANG” dropping Netflix Inc. (NASDAQ:NFLX) but adding mighty Microsoft Corp. (NASDAQ:MSFT) and Apple Corp. (NASDAQ:AAPL).

The “F” is Facebook Inc. (NASDAQ:FB). The other “A” is Amazon.com Inc. (NASDAQ:AMZN) and the “G” is Alphabet Inc. (NASDAQ:GOOG).

Between them, they stack up as a titanic 21% of the entire U.S. stock market. And they are the entire reason the NASDAQ is up 12% year to date (YTD), while the S&P 500 is still down 5% so far in 2020.

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Sector by sector, the FAAMG stocks have masked the quarantine’s economic drag. Consumer discretionary stocks, for example, appear to have overcome the entire pandemic decline, until you realize that Amazon is so large and has rallied so hard that it balances every other consumer company.

Amazon is up 40% YTD. Other stocks in the sector are down a collective 15%. That’s not the best of times. That’s a spectacular season for the giant and a scattered handful of other bull-market stocks like CHWY.

The communications sector tells a similar story. Facebook and Alphabet shook off the COVID-19 crash early. The rest of the sector is soft, hurt by declines elsewhere in the entertainment economy.

And even in technology itself, factor out Microsoft and Apple and everything else in the sector is only up 2.8% on average over the last six months. That’s not the sound of cheering across Silicon Valley.

Likewise, the FAAMG produced 75% of the NASDAQ’s gains for the year to date. Without them, the S&P 500 would be down 11%.

The biggest of the Big Tech names, in other words, made the difference between 2020 being a resilient, robust and resolute year and a season in the deep doldrums.

More Than Just Size

For all practical purposes, the NASDAQ, in particular, now surges or slumps solely on the basis of how these five stocks are feeling on any given day. They’re practically 50% of the index.

But they’re also relatively dynamic businesses. While the S&P 500 is staring at a deep earnings decline, Apple shareholders anticipate the bottom line will drop, at most, 8% over the remainder of 2020, at which point growth will recover three months ahead of the market as a whole.

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Amazon is also showing some earnings weakness, but it isn’t the kind of stock people own for sustainable profit anyway. This company is all about revenue, which isn’t under any pressure at all in a world where millions of households are ordering everything online.

Microsoft is still on track to actively expand earnings 9% in the coming year. Even in a quarter where other companies are seeing their profits cut in half, there’s maybe only a hint of a brief stall brewing here.

It’s a virtuous cycle. When the business defies broader economic headwinds, the stocks have room to fly. And when investors see these stocks flying, they cheer. Of course, I have even more aggressive growth opportunities on my screen, but you’ll need GameChangers for that.

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