When President Joe Biden signed the $1.9 trillion coronavirus relief package into law, market commentators couldn’t agree on what line to tow. Supporters might have expected markets to rise. The package’s carveouts for faster vaccine production, unemployment benefits, and $1,400 checks all point to higher short-term stock prices. Detractors, meanwhile, worried that the massive spending plan would raise long-term interest rates and stifle high-growth stocks.
In the end, both camps could have claimed victory. Value stocks had their best month in a decade while growth stocks struggled. Exxon Mobil (NYSE:XOM), a firm once left for dead by Wall Street, came roaring back with a 45% gain. Meanwhile, high-flying companies like Snowflake (NYSE:SNOW) and Zoom (NASDAQ:ZM) have seen prices tumble by 40% or more on fears of higher discount rates and lower growth.
But the story for high-growth stocks hasn’t finished yet. With so many growth stocks well below their all-time highs, the novel coronavirus relief package could become the very catalyst that helps these same shares recover.
Growth Stocks: A Stumble and a Recovery
It’s been an abnormally tough month for growth stocks. Two key factors have contributed to this sudden reversal.
Faster-than-expected reopening schedule. Many growth stocks are tech firms that benefit from people working from home. With U.S. vaccines pushed as early as May, investors have reconsidered how much longer these firms can grow.
Higher long-term interest rates. Rising interest rates harm companies with high future income (i.e., growth stocks) more than those with near-term profits (i.e., cyclical value stocks). Valuation ratios tend to compress when interest rates rise.
But a total abandonment of growth stocks seems premature. Long-term trends are still moving toward renewable energy, IT applications and innovative biotech; a large coronavirus package will not derail this broad movement. Instead, 2021 will see a shift in which tech companies win and lose.
Already, some companies like Tesla (NASDAQ:TSLA) and QuantumScape (NYSE:QS) have seen double-digit recoveries since early March. As consumer demand continues to pick up, investors should expect many of these tech firms to continue winning.
Some Winners, Some Losers
As the U.S. economy reopens, winning tech firms will need to grow earnings even faster than valuation multiples shrink. That means these firms must fundamentally benefit from people returning to life as usual. Ridesharing, hotel booking sites and any firms that help people move around are prime candidates to win in 2021.
That also means investors need to avoid the high-growth stocks that rely on work-from-home customers. Zoom Technologies has already seen its price-to-sales shrink from 120x in November to a more modest 45x today. Others like food delivery company DoorDash (NYSE:DASH), meanwhile, have already started struggling to maintain its pandemic-fueled growth.
To help you get started in picking high growth stocks that will benefit from U.S. reopening, here are seven companies that look set to win:
- Blink Charging (NASDAQ:BLNK)
- Tortoise Acquisition II / Volta (NYSE:SNPR)
- Airbnb (NASDAQ:ABNB)
- Lyft (NASDAQ:LYFT)
- Lemonade (NYSE:LMND)
Growth Stocks: Tesla (TSLA)
Back in January, I wrote that Tesla’s $880 valuation seemed too high. The stock went on to lose a third of its value before regaining some ground. But with the world looking to reopen, it’s time to consider Tesla again.
The electric vehicle maker was no slouch during the coronavirus pandemic. At the time, you might expect car buyers to zip up their wallets instead of splashing out on a $50,000 electric vehicle. Instead, Tesla used its direct-to-consumer business model to serve up some of the best cars in the world.
And demand hasn’t shrunk away yet. As more people begin to afford vehicles (and older Tesla vehicles start to age out), the firm looks on track to regain more lost ground. The firm might not return 10x because of its size, but it’s an excellent company to bet on in the long term.
Those looking for a more significant upside in EV markets should consider QuantumScape, the electric vehicle battery maker.
On Monday, Volkswagen announced plans to build six “gigafactories” in Europe by 2030 after QuantumScape announced a breakthrough in its technologies. For years, battery makers have struggled to prevent lithium-metal dendrites’ buildup – the plaque that causes solid-state batteries to lose efficiency after recharging. QuantumScape is one of the first companies to solve that problem. And with the release of a 4-layer cell, it looks like a matter of time before it can create the 12-layer cells it needs.
Much can still go wrong in QuantumScape’s development – investors should never go all-in on a tech firm until it’s crossed the R&D finish line. But those looking to put a small amount in will find that QS stock is one of the best bets in the industry.
Blink Charging (BLNK)
One unexpected winner of post-pandemic reopening will be Blink Charging, an electric vehicle charging station with more than 15,000 locations.
Buyers might have used the pandemic to snap up Teslas and other electric vehicles. But much like buying a beautiful wedding dress (or tuxedo), the pandemic prevented widespread use of these vehicles. This summer promises to change that.
Governments are already anticipating people hitting the road as the U.S. reopens. recently, a California city banned the construction of any new gas stations. And last week, Blink Charging won a grant to place 144 charging stations across Ohio.
As electric vehicles continue to roll out, investors can expect this relatively small $1.7 billion minnow to come rocketing back.
Growth Stocks: Volta Industries (SNPR)
The recent SPAC meltdown has left many firms with share prices at or below $10. Volta Industries, another charging station company, is one of them. After merging with Tortoise Acquisition II in February, the firm has seen shares plummet from $18 to barely over $11 as investors have questioned how the firm can make money from free-to-charge stations.
But don’t mistake Volta for a 1999 tech firm – a period when selling 90 cents for $1 might have seemed like a good idea. (Unfortunately for tech bubble investors, some losses get even more significant at scale). Instead, Volta brings an exciting model where advertisers pay for power. That means Volta (theoretically) is guaranteed a positive gross margin; the firm estimates they can achieve 40% margins in two years.
Whether that will happen is anyone’s guess. There’s a chance that even Volta will have to switch to a cost-sharing model to make things work economically. But the firm already has dozens of retailers and carmakers signed up. And at a $1.5 billion enterprise value, Volta’s stock still looks reasonable for a firm so sensitive to U.S. reopening.
As the world reopens its borders, investors can expect ABNB stock to rise. The firm looks on track to register 400 million guests in emerging markets by 2030, and the return of business travel could strengthen business even more.
Airbnb wasn’t always on such firm footing. In April 2020, the sudden loss of revenue caused its value to crater. The firm would lay off 25% of its staff to conserve cash.
But as the pandemic wore on, Airbnb showed its true strength. By the end of the year, the booking firm had recovered almost all lost ground as travelers looked to staycations and scenery changes to break up pandemic routines. Today, Airbnb is far healthier than any of its traditional hotel rivals.
Airbnb relies on a first-mover advantage. Many hosts will use a single booking site to fill their calendar – using two or more could end in double bookings and confusion. That means the company can continue building its franchise, even as other growth tech firms might hit snags.
Investors looking to profit from the U.S. reopening should consider Lyft, the only pure-play ride-sharing firm in the business.
The corporate decision to remain a pure-play company caused Lyft investor headaches during the pandemic; shares are still below their IPO price. But the firm stuck to its guns, resisting the call to make a splashy acquisition in food delivery.
As people return to the office and entertaining outside of the house, demand for Lyft’s services will soar. The firm is also reasonably priced at its $22 billion valuation, making it a tempting target for food delivery businesses looking to regain growth.
Growth Stocks: Lemonade (LMND)
Rounding out high-growth tech firms is Lemonade, a young rental insurance firm that does its business entirely online.
The fintech company went public in July 2020 to little fanfare. Though the firm has held its own, few people moved into cities – Lemonade’s core market – during the pandemic. Today, places like New York still have three times the usually available apartments to rent.
The sooner-than-expected vaccine rollout looks to change that. As more people move back into cities, analysts have pegged Lemonade’s growth at a staggering 58%. And because rental insurance contracts tend to be quite sticky, these revenues won’t disappear anytime soon.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.