Knowledge. Shared Blog

August 2020

Is There a Market Beyond Tech?

  • Matt Peron Matt Peron
    Director of Research | Portfolio Manager

In a recently published paper, Not a Question of Either/Or: Secular Trends and Economic Recovery Present Opportunities for Stocks, Director of Research Matt Peron explores the outperformance of large-cap technology stocks in 2020. In this accompanying video, Mr. Peron discusses some of the highlights, arguing that while tech companies are backed by powerful secular tailwinds, many other companies are adapting to a digital-first economy and/or continue to have sound fundamentals.

Key Takeaways

  • So far, stocks of large-cap technology and Internet companies are leading the market in 2020, backed by powerful secular tailwinds that have gathered strength during the COVID-19 pandemic.
  • Many other stocks have underperformed, leading to depressed valuations. But we think some companies could be being unfairly discounted, including firms pivoting to an omnichannel business model.
  • Thus, while large-cap tech stocks may continue to outperform, we think the market could recognize a broader set of opportunities, especially as economic growth improves.
View Transcript

Matt Peron: So, this year, we have seen leadership in the large-cap tech companies, in particular, and that’s not unwarranted. They’ve had terrific fundamentals. There’s been a secular wind at their back for a number of years and those trends were accelerated early on this year through the corona[virus] pandemic; and it moved everyone to online and just really took these trends to a new level. So, we’re seeing that play out, and to back them up, their valuations are actually quite reasonable. So, it’s not a surprise that they’ve led the market this year, and we probably will see that continue for some time.

But there is a very wide dispersion among valuations in the markets, as there is this perception that it’s winner-take-all. And we’re not sure that’s really the way to look at it because we think that as the recovery does take hold, you’ll see some of the other companies that haven’t participated start to participate as you realize that they, too, have a role to play and as they adapt their business models and as the recovery comes back. And there is where we see opportunity; that we can find companies that are adapting, that will adapt, that are going to be, ultimately, beneficiaries of the same trends, but their valuations are left behind.

There are some companies that have omnichannel capabilities; that is to say, they have an online but also a physical presence. And they’ll be adopting their business model to adjust as a new way of engaging with customers takes hold. One example would be in the entertainment industry where there’s physical games being played or [people are] watching specific sports, but yet they’re also having a companion experience, if you will, with online gaming or online sports participation in the sport through e-gaming, etc. That would be one example of an industry where it’s evolving their business model to really take advantage of the multichannel or an omnichannel approach.

We see a number of opportunities in the market. Some are just the valuation dispersions that I mentioned, cheaper companies that will be quite fine on the other end of the pandemic, and we see opportunity there. We also see opportunity in those companies that will be evolving their business models. And then finally, we see opportunities in companies that were unduly punished because of temporary disruption from the pandemic. So, take for example in the medical community, elective surgeries were canceled or paused until we were sure that we would have the hospital capacity. Those stocks were punished. As the hospitals are opened up and there’s a catch-up in these type of elective surgeries we think their fundamentals will resume and will recover.

The market is certainly sensing some risk from a second-wave shutdown in the fall, and you can see that by the discount of more cyclical companies, more economically sensitive companies to the more stable companies. And that discount is quite wide. So clearly, the market expects further disruption. So, the setup is very interesting because there might be an opportunity if there is a more nuanced approach to how we shut down the economy. It will allow for some of these businesses to resume, and we think there will be opportunities within certain areas for a catch-up as we learn how to deal with the virus as more of the therapeutics come online and more treatment options are improved. So, we think there will be opportunity for some catch-up, but the market is clearly nervous about the prospects of a second wave and that’s how things are priced right now.

Abandon Your Doubts,

Not Your Goals

Learn More

Knowledge. Shared
Blog

Back to all Blog Posts

Subscribe for relevant insights delivered straight to your inbox

I want to subscribe