The coronavirus outbreak and the effects of COVID-19 have gone deeper and wider than most people would have expected. That applies just as much to markets as anywhere. Whether it’s a tech sector that’s supporting our new work from home or re-rating as expensive EV/Sales multiples make less sense; a healthcare industry under the spotlight to find a vaccine, a cure, or provide treatment to patients; or various parts of the financial sector that have shown acute strain as the economy goes into the freezer for a few weeks, at least, there are no real safe havens or quiet zones.
Tech has held up comparably well. Industry leaders have strong balance sheets. The Internet is not just the superhighway for information and commerce, it’s the whole infrastructure, and it’s easier to imagine these companies surviving and accelerating their leadership. But that’s before you get into second and third level effects – the disappearance of advertising, the constraints on consumer budgets, and so on. So, how does the sector hold up?
We posed those questions to a group of Marketplace authors who cover different parts of the sector. Our panel features:
- Elazar Advisors, LLC, author of Nail Tech Earnings
- EnerTuition, author of Beyond the Hype
- Damon Verial, author of Exposing Earnings
- Andres Cardenal, CFA, author of The Data Driven Investor
- Cestrian Capital Research, author of The Fundamentals
- From Growth to Value, author of Potential Multibaggers
- App Economy Insights, author of App Economy Portfolio
- Steve Auger, author of Digital Transformation
- Michael Wiggins De Oliveira, author of Deep Value Returns
- Integrator, author of Sustainable Growth
- Mark Hibben, author of Rethink Technology
These questions went out Tuesday morning and came back through Thursday evening. Seeking Alpha questions are in header font, and disclosures for each author are included at the end of the article.
Elazar Advisors, LLC, author of Nail Tech Earnings: Tech is not a safe haven. We told subscribers we’d short the market using QQQ and SPY in late February very early in this crash. Tech is as economically sensitive as you can get. But investors have been taught to respect this tech boom and probably look at the Coronavirus correction as a blip in this secular trend in tech. Personally, though, if consumers don’t bounce back after the virus passes, the economy and tech both will have a big problem. I’m following trend. Short term OK, Medium term we’ll see. Things can change and fast.
EnerTuition, author of Beyond the Hype: A lot of technology development and deployment is not tied to physical presence. Observers would have noted that tech companies were some of the first companies to move their workforce to work-at-home very early in the epidemic. This lower dependence on physical presence makes many tech stocks significantly more resilient to the current downturn. This gives us a good reason to believe that these companies will fare better during the downturn.
Damon Verial, author of Exposing Earnings: Tech is no safe haven here and is also set to take a large hit. Hardware, software, and services are expected to see a significant slowdown in spending in at least the first two quarters of 2020. Admittedly, tech stocks are falling to a lesser extent than the rest of the market. Historically, this is rare, as tech stocks tend to have higher beta values, moving more quickly than the general market. However, in the current year, investors evidently (and justifiably) trust tech stocks and are less willing to relinquish stocks in this sector than those in other sectors. If we do see a bounce back upward, I’d say tech is still positioned to outperform the general market. Clearly, the risk/reward in tech is skewed a bit more in the bulls’ favor when compared to other sectors. Nevertheless, this does not make tech a safe haven during corona times.
Andres Cardenal, CFA, author of The Data Driven Investor: In a low-growth world, investors are particularly focused on finding companies that can continue growing in all kinds of environments, and the tech sector is home to many of the most innovative growth businesses. Besides, many big tech companies have pristine balance sheets and abundant cash flow generation, which makes them more attractive during a recession period with problems in the credit market. In a sense, technology is “the cleanest dirty shirt” in this environment, and that’s not going to change any time soon.
Cestrian Capital Research, author of The Fundamentals: The coronavirus correction isn’t particularly bad yet – at the time of writing SPY is down 20% YTD and QQQ down 14% – that’s still a remarkably modest decline given the damage being done to the real economy. That Nasdaq has fallen a little less hard in our view reflects an expectation that the market will bounce out of this crisis fairly quickly. Investors know that when a bounce comes, Nasdaq tends to move up more quickly than the S&P, and they don’t want to miss such a move if it comes along soon. So, in essence, the Nasdaq’s more gentle decline in our opinion represents a little good old fashioned FOMO.
From Growth to Value, author of Potential Multibaggers: I think the outperformance is logical. This crisis shows that tech is indispensable and it will only speed up the transition to more tech: Telehealth, working from home, video meeting, cloud computing etc. What we see now is that even grandparents use technologies they had never heard of just a few weeks ago. Our five-year old daughter asks if we will Skype (MSFT), Zoom (ZM) or use the mobile phone. That shows how deeply tech has been embedded in our daily life. So, all in all, I think it’s very logical that tech keeps up better than the rest.
App Economy Insights, author of App Economy Portfolio: The overperformance of the Nasdaq makes perfect sense in the context of a pandemic. Many areas of the economy are currently losing the vast majority of their revenue such as travel and hospitality, logistics, offline entertainment or live events. Tech is more resilient in a pandemic because cloud services and digital stores are in fact poised to thrive in a stay-at-home economy.
Steve Auger, author of Digital Transformation: We are in the early innings of the latest leg of the industrial revolution called digital transformation. The companies leading this transformation will emerge from the current market turbulence in much better shape than the general market.
Michael Wiggins De Oliveira, author of Deep Value Returns: Blanket statements are very dangerous to make, particularly when investing. There are some key companies, such as Amazon (AMZN), Apple (AAPL), Alphabet (GOOG)(GOOGL), and Facebook (FB) that should continue to plow ahead. However, there are numerous other companies that will perform terribly. This is particularly noticeable in companies that are rapidly decelerating their revenues growth rates while showing a total inability to generate any clean profitability. When the market starts reporting over the next couple of quarters, I would expect numerous nasty surprises.
Integrator, author of Sustainable Growth: I’m not surprised by this. In an environment where growth is, and will be extremely difficult to come by, and where there’s broad-based disruption across a number of industries including retail, REITs, consumer brands and media, technology provides one of the few sectors where there are strong secular growth stories that should continue to grow over the next few years, and where there’s strong balance sheet strength. Businesses such as Facebook and Google are extremely cash rich, as are many other large tech players. That becomes critical in an environment where there are real questions around the solvency of particular industries.
Mark Hibben, author of Rethink Technology: It’s justified by the experience of the 2008 Great Recession. That recession produced depressed valuations for tech stocks for a while, but the strong tech companies all recovered very well after the recession with no permanent damage. Large, well capitalized tech companies like Apple, Microsoft, and Nvidia (NVDA) were bargains to be snapped up during the downturn. The market seems to be applying this lesson learned to the current circumstances. No matter how severe the recession, technology will continue to grow as a part of everyone’s lives, perhaps even more so as we adapt to COVID-19.
Valuations are still healthy – Microsoft is at 26x trailing earnings, Apple is at nearly 20x trailing earnings, Salesforce.com (CRM) is at 7.5x trailing sales. Do you think the bear market will have a lasting effect on valuations in the tech sector, and how?
Elazar Advisors, LLC: Valuations matter to see how far something can fall if it falls. The virus is seen as a very short-term extraneous factor by most that should repair itself soon. This is not yet a banking crises or tight-budgeted consumer spending slowdown. Therefore, the Fed stimulus is causing markets so far are looking at this as glass half full. If the consumer does not come back then those valuations will correct more. The consumer is the first link in the cycle. Enterprise spending has held up well but is also at risk because it follows consumer spending.
EnerTuition: In some pockets of the tech world, the valuations may be heath, but in many others they may not be. A lot depends on the end market the companies serve. If the company’s product or service is targeting impacted sectors, then the valuations may take a hit.
Damon Verial: Right now, it’s hard discussing whether stocks are fairly valued because valuation is now ambiguous. Earnings reports generally led valuations, but now guidance is being postponed. During the bear market, earnings will be bad, and dividends will be cut, yet the market is still “overvaluing” stocks from a number of traditional metrics (EV/EBITDA, Graham number, etc.). Regardless, with the tech market taking a nosedive, it’s tempting to look for dip-buying opportunities, especially when we perceive valuations to be fair (or better). A good stock can rise while the stock market is falling. But recently, with so much money in ETFs, which buy baskets of stocks, ETF selling caused by market panic can push even good companies downward, valuation be damned. Right now, valuations matter less than a number of other factors, including sentiment, the magnitude of the COVID-19 impact, and the duration of the world economic lockdown.
Andres Cardenal, CFA: Valuations should always be assessed on a case-by-case basis, and there’s always the possibility that some tech stocks will see a compression in valuation ratios over the middle term. That said, there’s a good chance that the recession will provide some validation for the valuation premiums in top quality tech stocks. Many of these companies will prove to the market that they can keep generating solid performance through all kinds of conditions, and cyclical resilience in combination with superior long term growth potential deserves a valuation premium.
Cestrian Capital Research: Our house view right now is that the US equities market may yet take some more pain but that it will be moving up through Q3 to tie in with the Presidential election. We think that markets reflect a fairly positive look-through of current earnings – which everyone knows will be terrible (surely everyone knows?) – toward Q3, Q4 and 2021 Q1 numbers. And with that horizon in mind, we believe that earnings and revenue multiples in tech will remain strong.
From Growth to Value: Even a tech juggernaut as Amazon keeps growing its revenue by 20% every year. And then, Amazon is probably the tech company with the most capital intensive cost structure. Tech companies have a much lighter asset model and less depreciation of material, which means that their valuation is rightly higher than the old industries. P/E doesn’t say much when the E, the earnings, can suddenly grow by 500% over the next three years. I think a P/S of 7.5 for Salesforce is cheap for long-term investors. Don’t forget that Salesforce has gross margins of 75%, and if it wanted, it could have net margins of 30% or more. Value investors are bottom fishing for stock in dangerous waters, fully expecting that they will have to wait for three years or longer before the stock is fully valued again. Growth investors can wait for 3 years or longer too. At that time, Salesforce.com will trade at a P/S of 5, and it will still grow at more than 20% annually. Knowing the company, you buy shares of is much more important than using a screener.
App Economy Insights: Based on historical ratio of total market cap over GDP, the market is currently overvalued, even after the recent meltdown. It has been the case for the past seven years. I can’t predict market sentiment over the long term so I don’t waste time doing it. I leave that to those who claim they own a crystal ball.
Steve Auger: We are witnessing a global reset and there will likely be more carnage to come. So far, the declines have not discriminated against individual stocks, and I blame much of this on the high leverage ETFs that retail investors trade. These ETFs hold a broad array of stocks with a range of valuation. When an ETF is sold, this affects all stocks held by the ETF without discrimination. However, over time, the babies will be separated from the bathwater. Tech stocks that offer improved processes and cater to a digital economy will ultimately benefit and have a higher valuation.
Michael Wiggins De Oliveira: Absolutely no lasting effect. The world’s demands for technology continues to increase by leaps and bounds and will continue to do so going into the next decade. There will be huge winners that we can’t imagine today. And the darlings of today’s market will become fallen angels in the next decade. Consequently, overall valuations won’t change too much in the tech sector, but there will a swapping of companies that are best predisposed to benefit from the decade ahead. Having said that, we should continue to expect some names to continue to flourish in the decade ahead, such as MSFT. This company is not only incredibly well diversified, but its company culture is outstanding and unmatched by all but a few global peers.
Integrator: Investors will place a premium on businesses that can survive, have balance sheet strength and that can grow. In that context, tech names will continue to maintain a premium to the overall market. Valuations also need to be looked at in the context of where long-term interest rates are, and will be going forward. Working off the economic distress from the coronavirus pandemic will take some time. Low long-term interest rates will be lower for longer, certainly years and perhaps decades, given the secular shifts in population composition and the role of labor in the workforce. When looked at in this context, current valuations make perfect sense, even though they may look high in historical context.
Mark Hibben: I really don’t. Once again, technology companies have demonstrated that technology products and services will continue to play a greater role in people’s lives, and this basic trajectory is only somewhat perturbed by economic downturns.
Elazar Advisors: We got real excited about stay-at-home stocks like software gamers. People keeping a distance may not fix so fast so people found a new hobby, stay-at-home cloud battle royale. This business is jamming and probably has legs no matter what the economy does. You also have a big console cycle at year end. I don’t like placeholders. I like offense. These gaming stocks feel like offense to me.
EnerTuition: The coronavirus outbreak is certain to diminish economic activity in a very significant way for 2020, and there could be residual impacts in to 2021. So, the TAM for many companies is going to shrink. In this scenario, players who are eating into the TAM are likely to do better than companies that are primarily dependent on TAM growth. AMD (AMD) remains one favorite name in this regard.
Damon Verial: I have been looking for a better form of currency than USD due to living in Japan and expecting the USD/JPY pair to work against my USD income (the Yen is often considered a safe haven, growing stronger during economic slowdowns). While I personally won’t be buying Bitcoin because of the lack of a liquid ETF, my investigation into alternative currencies let me to suspect Bitcoin is setting up for a rally as it becomes increasingly seen as a safe-haven and prices recover. By May 2020, Bitcoin’s inflation rate will halve, and miners will have less incentive to sell, reducing selling pressure and increasing the possibility of a bull market for the coin. Another idea is food delivery services but not for the obvious reason (i.e., the increased need for food delivery). Rather, I believe restaurants now have an increased incentive to work with companies such as Uber (UBER), Grubhub (GRUB), and the soon-to-IPO DoorDash, as these services can keep otherwise closed restaurants in business. As the US locks itself down, we could see the restaurant industry begin directly investing in such companies to keep their industry afloat.
Andres Cardenal, CFA: Digital payments companies such as PayPal (PYPL) and Square (SQ) will suffer the impact from the recession, but they are going to come out of this crisis in stronger than ever shape. The same goes for DocuSign (DOCU), a market leader in digital signatures and contracts management software.
Cestrian Capital Research: Federal government IT services companies such as Science Applications International Corporation (SAIC) or ManTech International (MANT). These companies have revenues and earnings which are more resilient than most during this period – the credit quality of the principal customer (various wings of the US government) is excellent vs. corporate software providers, the cost-plus contracts which represent >50% of revenue for those two stocks have to be honored by the customer even when the services are not being delivered (because the companies are not permitted to reallocate skilled staff to other contracts), and the backdrop is rising government spend on software and services, so when the downturn ends you can expect some underlying growth to kick in too. These stocks have held up well as a result.
From Growth to Value: I don’t invest for bear markets, I invest for the long term, and inherently, that means I invest for bull markets because the market goes up more than it goes down. Bear markets are just temporary transitions between two bull markets. During that time, there are opportunities for long-term investors.
App Economy Insights: I think most investors need to avoid thinking too short-term in their trading. They try to perform well in all markets, when what really matters is to perform over multiple business cycles. Warren Buffett is not suddenly changing his entire investment philosophy and strategy just because the market is down 30%. He adds diligently to the companies he already identified as outstanding businesses.
Steve Auger: The best place to invest or hide is in companies that provide essential services to governments, the healthcare industry or large enterprises. Other than that, I would look for companies that offer improvements in processes and cost-efficiency.
Michael Wiggins De Oliveira: I believe that within the tech industry the best place is very well managed and highly profitable companies. One such company being Nvidia. This company has such a strong staying power and is not particularly expensive. Asides from the crypto bubble that skewed its fundamentals in 2018, this company will be able to withstand the downturn. Nvidia’s position in data center will obviously not meaningfully be impacted during this downturn, and further down the road, its auto business unit will finally pick up some highly anticipated (but not yet fully priced) traction.
Integrator: As economic growth retrenches, businesses will soon shift to looking at plays that can generate cost efficiencies. That’s going to create a focus on business that can help with tangible productivity improvements and cost realization. I’m looking to thematically play that with names such as ServiceNow (NOW) and others. To the extent that the business can realize cost synergies while also playing a role in contingency/disaster planning such as RingCentral (RNG) then those plays will make a lot of sense.
Mark Hibben: I believe that robotics, especially collaborative robots, will emerge as a big winner from the pandemic. As we seek to increase “social distance”, we will come to rely on robots for many interactions that would have been performed by human beings, simply because robots cannot be infected by human diseases and are therefore less likely to spread them. Collaborative robots is a class of robots designed specifically to work beside and interact safely with humans. I expect collaborative robots to play important roles in food delivery and restaurant service, warehouse operations, manufacturing, even things like grocery shopping. The leader in collaborative robots is Teradyne (TER).
Elazar Advisors: We were in the longest economic expansion of the modern era. Cycles do end. This one ended abruptly with coronavirus. So, many investors think when the virus passes, we get back to normal. But the question is, is the economy ready to bounce right back after the virus passes? That’s not a certainty. The market is trading like it should be so far with its latest bounce. But we’ll only know in a month or two if things are going to bounce back. We’re speaking to companies and doing the work to make sure we understand how this thing can transition.
EnerTuition: Some early stage companies’ future depends on making major inroads into the TAM of existing players. But, in times of uncertainty, the currently dominant players enjoy the benefit of safety. Growth delayed could be growth denied for some names. Balance sheet strength becomes critical during these times.
Damon Verial: Few sectors can elude the impact of SARS-CoV-2. Many investors seem to think that sector so-and-so is a safe place to sink money, but I can always think of a reason they are wrong. For example, some say that the work-from-home (WFM) sector will remain unscathed, but companies during slowdowns tend to fix their balance sheets by cutting costs, meaning that layoffs and AI replacements would be preferable to maintaining employees on a WFM basis. Others say that telecoms should be safe, but if you look at subscription numbers in China, hit first by COVID-19, you see a large decrease in telecom use during these lockdowns. Investors need to evaluate their thesis for a safe tech sector from many possible perspectives before convincing themselves that they’ve found one of the few safe investment strategies for these dangerous times.
Andres Cardenal, CFA: Too much money has been thrown at small companies with no economic viability in the tech sector over the past decade. In the words of Warren Buffett “Only when the tide goes out do you discover who’s been swimming naked.” The tide is now going down, and there will probably be a lot of problems in small tech companies, especially in the private equity space.
Cestrian Capital Research: The tectonic shift toward cloud compute loads will, we think, accelerate as a result of this episode. This shift is hardly news, but there are plenty of prior-generation companies whose decline and perhaps eventual demise will be hastened by more customers realizing that cloud-native is a more reliable and cheaper way to handle compute tasks. Stocks like IBM and Oracle (ORCL) that are already on the wrong end of the trend will, we think, see growth and earnings pressure intensify going forward.
From Growth to Value: All negative impact for the tech stocks I look at will be for the short term and I invest for the long term. As a whole, the tech industry will grow even faster because of this crisis. Everything has become tech now: Paying, shopping, transportation, working, entertainment… Yes, there will be headwinds for companies that rely on advertisements, yes some contract renewals will be pushed into the future and so on. But as long as you pick industry leaders of great quality, this will weed out the weaker competitors, providing a great opportunity for the leaders and investors in those leaders.
App Economy Insights: Investors should focus their attention on balance sheets. Companies that see their revenue growth slow down or turn negative in the next few quarters could see their cash flow collapse. You want to make sure the companies you invest in are recession-resistant and have the wherewithal to go through a very turbulent time unscathed.
Steve Auger: I would stay away from any industry niche that is being promoted by the tech industry but is not essential services. Examples are IoT, smart cities and smart technology of any sort. These are solutions looking for a problem and will be the first to be shelved in a recession.
Michael Wiggins De Oliveira: Investors are hoping that Software-as-a-Service or SaaS platforms will be able to withstand the downturn. I could not disagree more. For example, companies such as ServiceNow are being priced to perfection as investors expect both strong retention rates from existing customers and growth from new customers. Put another way, investors continue to expect that recurring business models in SaaS players will withstand the downturn, but investors are still pricing in growth in this downturn. I believe there will be a significant and protracted downturn in the SaaS sector and that investors are being excessively complacent.
Integrator: Tech is a very broad universe, and there are quite a few sectors that are speculative, with poor unit economics, lacking robust financing and still very expensive valuations. I expect some of these areas will get crushed. WeWork’s debacle should be a lesson to all investors in technology. I’d put Uber in this bucket as well.
Mark Hibben: The main thing that I think investors have not really faced yet is how long the effects of the pandemic are going to last. China was apparently able to start going back to normal after about three months of drastic public health measures, such as the effective quarantine of Hubei province. We don’t have the political will to take such drastic measures in this country, so I expect that it will take about six months to begin to restart the economy. Even then, the recovery will be slow. The economic impact that we’re seeing in the weekly unemployment numbers is really unprecedented and suggests a deeper and longer lasting recession than 2008.
Elazar Advisors: Obviously, people will be using apps that require less physical contact like Slack (WORK), Teams (MSFT), Amazon (AMZN) Retail, Skype (MSFT), and Zoom (ZM).
EnerTuition: Education and training are couple of areas where the world could see an accelerated move toward online tools post the current malaise. Online education and training could become much more sticky going forward.
Damon Verial: As previously stated, Bitcoin is likely to see its user base grow due to it being increasingly viewed as a safe haven and due to confidence in the US monetary system faltering. I’d also look to novel tech specifically, either produced by current tech companies or via IPOs, useful for bolstering public health. For example, I’d like to take a speculative position in an apps or similar tech that could be employed in a sort of social tracing, where users (or governments, depending on privacy concerns and laws) can view records of their interactions or physical proximities with others, allowing the spread of SARS-CoV-2 to be better monitored and analyzed.
Andres Cardenal, CFA: This is going to create plenty of demand in areas such as online communications, process digitalization, and specific software services. Many corporate clients will start cutting costs, achieving all kinds of efficiencies and improving the customer experience with software and digitalization during the crisis, and they will never go back to the old ways of doing business after this is over.
Cestrian Capital Research: The one-time shift to videoconferencing (eg. ZM) and remote healthcare services (eg. Teladoc Health (TDOC)) will, we think, not fall back to their prior level once the crisis subsides but instead will find that some of their increased customer count and increased usage per customer will stick. These two stocks may suffer short-term valuation multiple compression once COVID-19 is receding in the rear-view mirror, but on a long term basis, we think these areas and indeed these specific companies will continue to grow revenues and earnings.
From Growth to Value: There are lots and they are obvious to everyone, I think. Every retail store that didn’t have a great online strategy up to now will reconsider it, telehealth will explode, working from home will be much more common, videoconferencing will become the standard, digital document management will be broadly adopted, on-prem will be even more replaced by cloud etc.
App Economy Insights: Disruption tends to thrive in a crisis. Beyond the very obvious software tools that facilitate work-from-home, long months of sheltering-in-place may evangelize people who were reluctant to shop online. As an example, console gaming could shift decisively from physical to digital sales in the coming months with new purchasing habits forming.
Steve Auger: Work from home will be a major theme this year, and I would expect mobile apps to flourish. Companies that provide business-related apps for such things as Human Capital Management ((HCM)), work scheduling, etc. Also, remote collaboration platforms will flourish.
Michael Wiggins De Oliveira: Picking out winners is always a very challenging game that everyone else is trying to play. As a value investor, I don’t try to predict the future. I look the past to assist me in the future. Having said that, I believe that Amazon will continue to take market share, as consumers continue to demand no-hassle merchandise delivered to their doorsteps rapidly. On the second level, Amazon continues to rapidly build goodwill with consumers that today is not yet fully reflected in its financials. Nevertheless, Amazon’s goodwill is there and growing even if GAAP counting can’t show it.
Integrator: I see cloud services and the cloud economy in particular accelerating as well as result of the downturn. CIOs will question the need to maintain expensive on premise equipment as part of a broader cost efficiency drive. Additionally the need for workers to be able to access needed services from wherever they are will further play into distributed software access and cloud computing. This also will play nicely into broader trends toward software define networking to support smaller branch offices and remote working. Finally, cloud first cybersecurity will see a nice pickup. With so much traffic accessing corporate networks from dispersed locations, investments here by CIOs will be a no brainer. I particularly like Zscaler (ZS) as a good cloud first security play.
Mark Hibben: Working from home still requires the trusty old PC, whether Mac or Windows. Microsoft’s Windows OEM sales to consumers lagged all through 2019 compared to enterprise sales in advance of the end of support for Windows 7. 2020 could see the situation reverse, where consumer Windows 10 OEM sales outpace the enterprise.
Elazar Advisors: Nothing. I think my process is something that works for all markets as long as you stay disciplined. I still have three things that I look for and I don’t change. I need: 1) 45% 12 month upside potential; 2) I need my quarterly earnings at least inline with the Street so we don’t have risk quarters in the portfolio; 3) I need “Wow.” Wow means – can I say an honest wow after I did the work and I don’t forsee any obvious risks? So I can’t buy things because I think they’re going to bounce. I’m buying things that will only give me conviction that the coming EPS reports can justify the stock price going much higher. These ideas in the portfolio of course change based on market conditions so that we meet those three criteria. I’m very stubborn on my process.
EnerTuition: Not much has changed except the conviction that one needs to stay with reasonably valued growth names. Highly valued growth names could have a period of extended underperformance.
Damon Verial: All things considered, my portfolio strategy has not changed much. I’m a trader, not an investor, and so my positions are mostly short term, without bias toward certain companies. I trade in the direction of the market, meaning the impact of COVID-19 on my portfolio was primarily a switch from being net long to being net short.
Andres Cardenal, CFA: Sustainability is key in this environment. Companies need to ideally have strong cash generation, or at least a very solid balance sheet with lots of cash and low debt. I don’t want to bet on companies that need too much external capital right now.
Cestrian Capital Research: No change.
From Growth to Value: Nothing has changed at all. I have always looked for potential multibaggers and companies that are future-oriented and this crisis only favors those companies, now and even more in the next few years.
App Economy Insights: I feel like the App Economy Portfolio has never been more relevant. My real-money portfolio is exposed to categories that are likely to gain tremendous tailwinds: Social media, e-commerce, digital payments, artificial intelligence, gaming, e-sports, live streaming, online dating among others. The COVID-19 pandemic may accelerate consumer behavior and help the most innovative companies in the portfolio thrive in the next ten years.
Steve Auger: Actually, nothing has changed from my perspective. I employ quantitative techniques to identify the best stocks to hold and I don’t foresee any change in that strategy.
Michael Wiggins De Oliveira: I’m still very cautious of investing in just about any tech company at the end of this very long bull market that has only recently finished. For now, there are still many companies being priced simply on narrative, but with poor profitability. But I’m very attentively looking to pick up on strong bargain opportunities in solid free cash flow generating companies.
Integrator: I’m looking for greater balance and diversity in my portfolio overall, while reducing my exposure to plays that are less well capitalized, and with less favorable unit economics. I’m doubling down on businesses where there is clear value propositions, a strong stickiness in core product for a mission critical function, good recurring revenues and solid ROI to customers. I’m also trying to ensure a good spread with respect to underlying exposures. For example, I don’t necessarily want too much exposure to areas that are economically sensitive (ad supported business models for instance), which will likely feel the burn over the next 12-18 months. More than anything, I’m positioning for the upcoming decade. I’m not terribly troubled by how things shake out in the immediate near term, beyond knowing that businesses in my portfolio have the capacity to manage independently.
Mark Hibben: At least temporarily, I’m more interested in putting money into companies I already own and trust, since they are currently discounted, rather than identifying new companies to invest in. This will probably reverse once the market bottoms out.
Elazar Advisors: Again, as said just above. I have no changes what I look for. My process is what we’re all depending on. Since I look at EPS and not “stories” I only care when those coming quarterly EPS will justify a higher stock price by showing upside. My process is cookie cutter. The stocks in the portfolio of course change based on what’s going on in the world. But the process has garnered steady performance in each bull and bear market. It does that by figuring out where will earnings jump in THIS environment.
EnerTuition: Good growth profile past 2020, strong balance sheet, growth tied to online world rather than the physical world.
Damon Verial: I’m mostly short, so my potential winners are short plays. Primarily, I’m trying to forecast which sectors will be most impacted as more negative news is released. I correctly called the market top – shorting the market and cruise lines – because I had a pulse on the coronavirus. I continue to spend several hours a day reading about this virus and its potential impacts on the economy, providing my subscribers with plays that should yield high ROI as the situation worsens. Right now, I’m looking at possible ways to play the fact that the government’s $2T economic rescue package is being overestimated in its ability to bolster the economy. State and city governments stand nothing to gain, and their budgets are filling with debt. I see many government contracts with tech companies being cut in the near future and am thus searching for tech companies reliant on governments’ business and/or financial support.
Andres Cardenal, CFA: Management team and competitive strength. The quality of the management team is always very important, but especially more during turbulent times. Almost anyone can run a business reasonably well when the economy is growing strongly and credit is abundant. But it takes a skilled pilot to navigate through a storm, and the best management teams will be able to turn this crisis into an opportunity for long-term gains. Competitive strengths are the factors that allow a company to protect its profits from the competition. Brand differentiation, the network effect, and superior technologies are some of the most relevant sources of competitive strengths in technology. These factors are crucial in terms of surviving the recession and even benefiting from it.
Cestrian Capital Research: For buys in tech, the same as always – sound, predictable revenue growth, high gross margins, strong operating leverage, low capex, healthy levels of change in net working capital and therefore good conversion of earnings into actual cash, with a safe balance sheet and trading at a valuation level appropriate for the rate of revenue growth.
From Growth to Value: The same as always. I look for potential multibaggers that can become ten-baggers or more, that have a visionary leader, with management that has its interests aligned with shareholders by owning a sizeable chunk of shares, with lots of innovation, outstanding execution and a long-term vision, companies that give their customers a competitive advantage or make the customers’ operations cheaper, faster, and easier.
App Economy Insights: I always look for companies that have the potential to at least double in the next five years. Outstanding culture and leadership, relatively small size, healthy balance sheets, improving margins and operating cash flow, fast top line growth with secular tailwinds are among the main characteristics I look for.
Steve Auger: I look for companies with high consistent revenue growth, low operational leverage, and positive sales surprises. This is the same strategy I used prior to the bear market.
Michael Wiggins De Oliveira: A very strong business model, with stable growth, high margins, and oozing free cash flow. Lastly, priced in the bargain basement with rock bottom expectations. This is easy to ask for in practice, but very difficult to find in reality. Typically, investors get these sort of opportunities when there is something wrong with the company. More often than not it has poor visibility and unattractive outlooks over the medium-term (meaning 12 months).
Integrator: Strong secular tailwinds, and positioning in spaces that are poised to experience long term growth and capture shift in spend. A high level of cash generation (rather than promise of cash generation) to control their own destiny. Good returns on invested capital, or a pathway to derive these returns on invested capital. A convincing value proposition to customers, with clear focus and return on investment in the enterprise space, particularly as budgets become tight and have greater scrutiny. In a nutshell, I want large, expanding moats and have had a particular bias to network effect based platform businesses more recently that provide a high likelihood of success. I only see this focus getting stronger going forward.
Mark Hibben: Recession does put stress on companies with marginal profitability and capital reserves, so I tend to want companies with demonstrated strength and durability to withstand the stress. As I have indicated, this could be a very deep and long lasting recession.
Elazar Advisors: There’s a bunch but I am very excited about the gaming software space. Take Activision Blizzard (ATVI) for instance. I’ve been following it for a long time but it hasn’t really given me what I needed to be at a Strong Buy Rating. Now, though, their recent launch of Call of Duty, Warzone could not come at a better time. Call of Duty is a huge percent of the business and people are staying at home, playing, ingame buying, etc. My numbers are much higher than the Street. This is the type of things we like. Something that can give you conviction in any market based on the coming earnings progression potential getting you there.
EnerTuition: AMD (AMD) continues to be top tech favorite. SolarEdge (SEDG) is a strong name on of the solar front. Amazon, despite rich valuation, also has a lot going for it in post COVID world.
Damon Verial: At this point, I’m only long Netflix (NFLX) for its ability to gobble up the “market share” of home entertainment budgets while everyone is under lockdown and Inovio Pharmaceuticals (INO) as a speculative play on the potential COVID-19 vaccine. Everything else is a short position.
Andres Cardenal, CFA: Twilio (TWLO) is an interesting name to consider. The company is a market leader in communication platform-as-a-service. When you send a voice message via WhatsApp, or when you get a notification from Uber, those services are powered by Twilio. Companies all over the world will become increasingly conscious about the importance of these kinds of services and applications during the lockdown, and Twilio has an outstanding reputation for quality and innovation in this market. The stock is down by over 40% from its highs of the year, yet revenue grew 62% year over year last quarter. The company is currently unprofitable due to high investments for growth in the years ahead, but Twilio has a solid business model supported by recurrent revenue and nearly $1.8 billion in cash and liquid investments on its balance sheet.
Cestrian Capital Research: In tech, Veeva Systems (VEEV). This is a wonderful business, an industry-specific cloud software company which keeps defying expectations that its growth will slow as a result of a limited addressable market. But the company keeps on innovating to expand that market opportunity and the growth has held up. Margins and cash generation are good and the only thing not to like is the valuation multiple. Having sold out some time back, we bought back in during the correction and the stock has rewarded that decision very quickly. We think it’s a great bet for the long term, just buying and holding while the company continues to grow – there’s potential upside from the company being acquired one day too.
From Growth to Value: I have added to my Square (SQ) position at $53, $45 and $33. While most investors still look at the POS technology (point-of-sale), the more important part of Square is Cash App, its consumer ecosystem. It’s growing at neck-break speed. I’m fully aware that the stock may tank again, but I’m also fully confident that in 2030 these prices will make other investors jealous.
I also bought more shares of The Trade Desk (TTD) at $165 and $140. I think the numbers will show that people have increased their CTV (connected TV) watching tremendously. While The Trade Desk might feel the blow of a recession temporarily, I think it will still grow because advertisement money from traditional TV will switch to CTV. I could go on naming stocks, but I think you get the feeling: invest for the long term in quality companies and make sure you know what you buy.
App Economy Insights: I particularly like companies that were hit hard by the recent market meltdown but are likely to be recession-resistant. A great example is Huya (HUYA) a leader in e-sports and video game live streaming. Most investors assume that the company will suffer due to live e-sports events being cancelled. But e-sports events are merely a user-acquisition tool and the revenue of the company comes primarily from live-streaming. Influencers and viewers are currently stuck at home, which creates an even stronger tailwind for the business.
Steve Auger: I like Everbridge (EVBG) which provides a mass alert service and related products that could apply during the COVID-19 outbreak and also our ever-evolving environment of terrorism, natural disasters perhaps due to climate change, etc. I believe that security threats will accelerate during the pandemic and certain cybersecurity companies will flourish. CrowdStrike Holdings (CRWD) appears to have the best growth story among them.
Michael Wiggins De Oliveira: Micron (MU) is a very attractive company that many investors erroneously believe is a cyclical company. It has some cyclicality, but nowhere near that of its recent past (2016). Furthermore, today Micron is more diversified and niche-oriented than it was during the previous downturn of 2016. It simply oozes cash flows, it is expertly managed, and incredibly cheaply priced.
Integrator: ZScaler (ZS) – Cloud first network security is going to be increasingly valued by CIOs, and ZScaler is my top choice here. RingCentral (RNG) is also a play I really like, not only for the next few years but longer term. Cloud-focused enterprise communications make a lot of sense, not only to extract cost synergies but also for an increasingly distributed workforce and in the context of enterprise contingency planning.
Mark Hibben: The technology companies I like right now have long been in my portfolio. Apple, Microsoft, Nvidia, ASML Holding (ASML), and Taiwan Semiconductor Manufacturing Company (TSM), and of course, Teradyne.
Thanks to our panel for chiming in. It promises to be an interesting time ahead for tech as for every other sector. We still have macro, market outlook, short selling, dividend investing and fixed income roundtables on tap. Any other topics you’d like to hear about? Let us know below.
See also COVID-19: The Best Companies Will Likely Come Out Stronger on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.