Time to Buy Back into the COVID Stocks
The "COVID stocks" may have fallen from their peaks, but they're still fundamentally solid. Jeremy highlights three areas that should continue outperforming in the future despite selling off as the...
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 puts us just 3% away from all-time highs in the indices. It has been 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.
Life is not 100% back to normal and 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 stocks like airlines, hotels, restaurants and cruise lines. This created a divergence on some trading days that separated the performance of the Nasdaq and S&P by as much as 1%.
Delta Changed Everything
The delta variant has unfortunately stopped the momentum reopening stocks saw earlier in the year. While vaccinations are slowing the spread, the world is still having issues fully coming back online.
Investors now must look at the staying power of the “COVID stocks”. Many of these names have fallen from their peaks, but continue to perform fundamentally as we drift through the delta stage of this pandemic.
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.
Continued . . .
Is the Market Rigged?
How often have you owned a stock that gets pummeled with no logical explanation? This is often caused by computer-driven High-Frequency Traders (HFT). They fire off massive amounts of short trades to drive stock prices down, then profit from the rebound. Their gains come at the expense of human investors.
The good news is that Zacks has mounted a Counterstrike to catch the best of these “manipulated price drops” as they rebound. For example, we recently closed gains of +40.2%, +49.1%, +62.0%, and even one for +252.0% in less than a month.¹
Access to these trades must be limited. It closes to new investors Sunday, October 10.
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We all know the big names that did well during the pandemic. Companies like Amazon, Microsoft, Netflix, Apple 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, growth 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 135% from those COVID lows.
Let’s go over two stocks that became household names over the last year and continue to do well while navigating 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 beat expectations, with an EPS surprise to the upside of 17% in late August.
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 and has dropped back to the May lows around the $275 level.
The company is valued at $82 billion and investors are looking to buy the dip if the current support area can hold.
DOCU- DocuSign 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 continued in 2021, as the company has reported two beats on EPS of over 60%. The most recent quarter saw a beat of 20% on earnings, but analyst estimates for the current year and quarter are headed higher.
The stock was up almost 200% in 2020, hit new all-time highs in August, but has since pulled back over 15% from highs. The stock is now worth $54 billion as investors seem to be accepting that the company’s momentum is not stopping anytime soon.
2) Consumer Staples
This sector is comprised of the goods and service 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 53% from the March 2020 lows to August 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 4% every quarter since that big July number.
The company is valued at $345 billion, pays a 2.4% dividend. The stock is only 2% off its 2021 highs.
WMT- Walmart is the 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. Their most recent quarter saw a 14% beat, which brought in some selling off all-time highs.
While the momentum has cooled a bit, Walmart continues to outperform, beating earnings expectations five out of the last six quarters. The company is almost valued at $400 billion and pays a 1.5% dividend.
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 RVs and the desire to camp increased.
While America has opened up, the demand for camping is still there as we head through the fall months. We have already seen evidence of this when two of the RV manufacturers recently reported earnings.
THO- Thor Industries is the largest manufacturer of RVs in the world. Some popular brand names include Airstream, Jayco and Keystone.
The company had 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 this June, as well as posting an order backlog of $14 billion. The only issue for Thor is making the RVs fast enough, which 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 has ever been, which has the company valued at $6 billion. Investors can also 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 $2.2 billion and has strong brand recognition after being around for sixty years.
Winnebago is smaller and only pays a 1.1% dividend, but an EPS beat of 23% in June helped the stock bounce. The stock is now trading sideways, but looks poised to go higher if the company can show investors that earnings momentum will continue when they report in October.
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 so 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
Look inside our Counterstrike portfolio today and you may also download our Special Report, 7 Best Stocks for the Next 30 Days, absolutely free. These buy-and-holds are the perfect complement to Counterstrike's faster-action trades. Zacks experts reveal stocks believed to have great upside potential over the next 30 days.
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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 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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