How Tech Stocks Escaped the Coronavirus Market Meltdown
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The coronavirus has hit some parts of the U.S. a lot harder than others. That’s true of the stock market too.
Exhibit A: Tech stocks. While the broader economic numbers are grim indeed – 20 million Americans losing their jobs in April, unemployment at 14.7%, first-quarter GDP contracting 4.8% on an annualized basis– you wouldn’t necessarily know it by looking at the stock prices of technology companies.
In fact the S&P 500’s technology index is the only sector that is actually up for the year, rising 2% as of May 13. Compare that with hard-hit sectors like energy (down 38%), financials (down 31%) and industrials (down 26%).
You might say that tech stocks are displaying a kind of herd immunity to the current crisis.
“A number of mega-cap names in the tech space have very resilient business models, and are able to continue to churn out earnings during this incredibly challenging time,” says Russ Koesterich, portfolio manager for BlackRock’s Global Allocation fund, whose top holdings include some familiar names like Microsoft, Apple, Google-parent Alphabet and Amazon.
“They have fortress-like balance sheets -- and in some cases, their business models stand to benefit from all the changes going on.”
Indeed, just look at your daily schedule for some clues about who might benefit from coronavirus-related upheaval. Perhaps you are now working from home – meeting with colleagues by teleconference, using your Apple devices, working on Microsoft platforms, storing files in the cloud, and getting stuff delivered by Amazon. If we’re all penned in at home and more reliant on technology than ever before, that’s hardly catastrophic news for the sector.
That’s showing up in the numbers: The trailing price/earnings ratio of the tech-heavy Nasdaq 100 index stands at a lofty 28, despite the devastation across the rest of the economy (https://www.wsj.com/market-data/stocks/peyields).
“Two of the biggest tech trends going on right now are the migration to the cloud, and the shift of ad dollars to online,” says John Freeman, vice president of equity research for independent advisory CFRA Research. “My thesis is that trends like that only get accelerated when the economy hits the fan.”
Not all tech stocks created equal
Of course, no two tech companies are created or valued alike, so they don’t all share the same prospects. Freeman prefers names deeply involved in cloud computing, like ServiceNow and Salesforce.com.
Meanwhile equity research firm Morningstar, in a recent note, highlighted top picks like cybersecurity experts Palo Alto Networks, software firm VMware and semiconductor giant Intel.
If it’s risk you are looking to avoid, the better choice is not an individual stock at all, but a fund with a large basket of holdings.
A handful singled out for superior performance, by analytics firm Refinitiv Lipper: The Vanguard Information Technology Index Fund Admiral Shares, named best Science & Technology fund of the last three years; Fidelity Select Software and IT Services Portfolio, the 10-year champ; and iShares Expanded Tech-Software ETF, which gets top marks in multiple categories like consistent return, total return, expenses, preservation of capital, and tax efficiency.
Covid caveats
The tech sector should give you some cushion for the bumpy ride ahead. But with valuations already high and portions of the rest of the economy on life support, don’t expect miracle returns going forward.
“Prices are not cheap,” admits BlackRock’s Koesterich. “Returns won’t be as robust as they were for the last 5 to 10 years, because you’re starting from higher valuations.”
With society tilting heavily in the direction of tech stocks, though – media streaming, video gaming, e-commerce, cloud computing, and almost any other dominant trend you care to mention – they should give your portfolio a sturdy floor, no matter how the virus plays out.
“Just think about the technological change that is taking place right now, and who benefits and who doesn’t,” advises CFRA’s Freeman. “Whatever timeframe you thought that was going to take before – speed it up.”
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