Don’t Be Fooled Into Selling the Big Winners of 2021

Wall Street is celebrating the holidays!

On the back of strong economic data, very good Covid-19 vaccine news, enhanced political clarity, and much better-than-expected corporate earnings, the stock market has soared into record territory – and done so at record speeds, with the S&P 500 staging its biggest post-election rally in history.

But this rally has not been equitable.

In fact, this rally has been very unequal.

Traditional market laggards and physical industries impacted heavily by the Covid-19 crisis – like retail stocks and energy stocks – have been absolutely on fire.

The Energy Select Sector SPDR ETF (XLE) is up more than 30% over the past month.

But traditional market leaders and technology industries insulated from the pandemic – like cloud stocks and e-commerce stocks – have been grinding higher at a much, much slower pace.

The First Trust Cloud Computing ETF (SKYY) is up just 5% over the past month.

That’s an unusual dynamic. Prior to November, energy stocks were down 50% in 2020, while cloud stocks were up 25%.

In 2019, cloud stocks rose 24%, while energy stocks nudged higher by just 4%.

Same thing in 2018 (cloud stocks up 6%, energy stocks down 20%) and 2017 (cloud stocks up 33%, energy stocks down 4%).

For years and years and years, cloud stocks have outperformed energy stocks, growth stocks have outperformed value stocks, and “new school” stocks have outperformed “old school” stocks.

Until November 2020.

And now, many analysts and investors are calling for a “changing-of-the-guard” from growth stocks to value stocks.

Don’t listen to those folks.

These are unusual times, and they won’t last.

That is, the once-in-a-lifetime Covid-19 crisis disproportionately impacted different companies, significantly hurting value stocks reliant on a physical economy in lockdown mode, while actually boosting growth stocks that were thriving in the newfound digital economy.

The phasing out of this crisis with widely available and highly effective vaccines in 2021 will be similarly disproportionate. It will materially boost value stocks as the physical economy reopens and hurt growth stocks as digital economic reliance lessens.

And that will be that.

No long-term implications here. Just a minor adjustment. Following the minor adjustment – which is happening today – 2021, 2022, 2023, so on and so forth, will look very much like 2017, 2018, and 2019, in that they will comprise a secular, steady, and gradual transition from the physical economy to the digital economy.

Amid that unmoving transition, growth stocks – and in particular, tech stocks – will remain the big winners on Wall Street.

So… don’t give up on growth stocks because they are being relatively quiet during this loud party.

Instead, double-down on them.

Look for long-term opportunities where the market is being unnecessarily short-sighted.

Like in Zoom (ZM) stock, which has plunged 25% over the past month yet is still immersed in a world wherein video conferencing represents a future mission-critical component of enterprise workflows…

Like in Peloton (PTON) stock, which has dropped 23% over the past month yet is still at the epicenter of a secular transition away from gyms and towards more convenient, more efficient, and more economic at-home workouts.

Like in Wayfair (W) stock, which has shed 30% over the past few months yet is still the leading online furniture platform at a time when home goods sales are rapidly migrating into the digital channel.

These growth stocks are long-term winners.

Current weakness is nothing more than noise.

Take advantage of that noise. As the great Warren Buffett had said multiple times, be greedy when others are fearful.

Those words are especially relevant when talking about hypergrowth stocks, in hypergrowth industries, suffering from near-term pullbacks.

That’s the best time to get greedy.

Let’s see where these stocks end up in 3 months… better yet, let’s see where they end up in 3 years…

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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