These 'Pandemic Stocks' Are Here to Stay

COVID-19 accelerated the 'shift'... The Nasdaq goes 'green' for 2020... These 'pandemic stocks' are here to stay... Who wants to pay with paper anyway?... 'Virtual' work and play... The cloud and hackers... 'Normal' won't change these trends...

It's a simple indicator of a mammoth shift in U.S. stocks...

After the closing bell a lot of days recently, you might've noticed something a little different from what you witnessed over the past decade...

Two reds and one green... or one green sort of higher than the other two.

In other words, among the three major U.S. stock indexes, "one of these did not belong"... but it was where you wanted to be.

The tech-heavy Nasdaq Composite Index has been consistently outperforming the benchmark S&P 500 Index and Dow Jones Industrial Average since the start of the year... into February's highs and during March's panic lows... and back again.

Don't these indexes usually move together? Isn't that the "market"? More often than not, sure...

In a bull market, everything is going up and the major indexes reflect that. In a bear market, not so much... And what always happens in the market – different sectors of stocks gyrating at different scales and frequencies – is just more obvious now than in the "good times."

If you've been following along with the daily after-market recaps from our Stansberry NewsWire team (which you can do for free right here), you've been aware of the "tech is your friend" part of the story in U.S. stocks...

This isn't anything new... "FAANG" is a term that hasn't needed any introduction for about five years. And as the pandemic hit, the Nasdaq and big tech stocks were outperforming the other two major indexes, too.

And as the U.S. stock market crashed, the shares of tech leaders like Amazon (AMZN), Alphabet (GOOGL), and Apple (AAPL) did so less than the rest.

But here's the point...

As COVID-19 has spread around the world and pandemic life has become a reality, trends that were already underway for years – like the world's increased reliance and ability to work using modern technology – have simply accelerated even faster...

At the speed of, say... your Internet connection.

Today, this fact became obvious to a lot of investors...

The headlines of the day focused on this: The Nasdaq broke into positive territory for the year (now up about 1%) for the first time since the coronavirus-related sell-offs began in February.

Meanwhile, the S&P 500 is still down 10% since the start of 2020... and the Dow Jones Industrial Average is down more than 15%.

So, what gives?

Well, first, it's important to note that this is why it's so critical to look at the actual composition of these indexes or any exchange-traded funds that you buy at any time. In other words, what's in the box? What's in one doesn't have to be in the other.

Second, the Nasdaq being back above water is another example of how everyday incremental changes can add up to seemingly surprising results over time. I (Corey McLaughlin) wrote about this idea in the April 22 Digest.

In that piece, I was referring more to how consumer behavior itself – how "We the People" – can influence our economy, which we often forget (even though 70% of the U.S. economy comes from everyday spending.)

But the same idea of "compounding" right under our noses can apply to anything, really... Can you imagine a time when a lot of little things didn't happen before the big headline that they resulted in?

For instance, the more suggestions we hear from Dr. Anthony Fauci and company with the Trump administration's Coronavirus Task Force, the more it sounds like COVID-19 was brewing in China for at least months before folks started to notice... And it finally started spreading rapidly only after it found a lot of carriers in the dense, industrial city of Wuhan.

(This theory, of course, assumes that the virus was not man-made in Wuhan itself.)

Fast-forward several months, and "unessential" people (myself included... hard to take) who still have jobs are working at home... Public schools here in Maryland are closed for the rest of the school year... Life in general is strange... And we're questioning how much more money the federal government can print before killing capitalism forever.

Third, the Nasdaq going positive – led by Microsoft (MSFT, 12% of the index and a favorite of several of our editors), the FAANGs, and chipmakers Intel (INTC) and Nvidia (NVDA) – should alert investors that tech and many other lockdown-related companies have tremendous catalysts behind them right now...

Look at how the 'pandemic stocks' have taken over recently...

As NewsWire editor C. Scott Garliss told us today...

The economy is shifting, and tech is the beneficiary. And if you break down the top Dow stocks, they're even virus-related.

And he sent along a collection of numbers, which we've turned into two charts.

Here are the top 10 stocks, by weighting, in the Dow Jones Industrial Average a year ago...

And here are the top 10 stocks in the Dow today...

Take Home Depot (HD), for instance... It's considered an "essential" business, and its rise appears to reflect the idea that people stuck at home are finally getting around to that home-improvement project they've been putting off for weeks... months... years.

And Apple – you can't spell FAANG or do a lot of business without it – is now leading the Dow.

Tectonic-sized market shifts like these wind up creating support for the Dow Jones Industrial Average and buoy some of the sell-off of former Dow top dog Boeing (BA)...

The airline manufacturer and government contractor, which accounts for about 1% of U.S. gross domestic product, still has problems with business that aren't going away any time soon... like the steep coronavirus-induced drop in travel demand.

The point is, a lot of what's happening today was happening before, just at a slower rate and scale. But much like the broken, flickering light in my house that I didn't much care about before I started spending all day inside, certain things are more obvious now...

As Scott says...

A different kind of "disruption" is changing the game right before our eyes...

I don't know anyone who follows the day-to-day gyrations of the market more than Scott... So now, we'll turn the floor over to him to share more detail on the "pandemic economy" winners so far. And he says they'll be the winners in a more "normal" future, too.

One name that stands out above everything else – Amazon...

Given that I (C. Scott Garliss) – along with millions of others – have now spent weeks confined to my home, it's amazing how much Amazon touches my family's day-to-day activities.

Prior to the pandemic's rise in this country, we had never used its food-delivery service, Amazon Fresh. That was before the rush to stockpile canned goods, vegetables, and toilet paper... not to mention the hours-long lines at some of the local stores. In addition, we wanted to avoid as much social contact as possible.

Amazon Fresh seemed like the perfect solution to our problem.

Apparently, everyone else thought so, too. Right away, we discovered that Amazon only allowed food-ordering within a three-day window. If nothing was available, then it was a no-go. We've run into that problem multiple times.

I've also grown accustomed to having groceries show up at my house between the hours of 9 p.m. and 11 p.m. It's fascinating and unbelievable all at once.

Amazon has also become part of our school routine. I have a 7-year-old son and a 5-year-old daughter. They're both involved in virtual schooling.

Despite the fact that they're learning from home, they still need school supplies like journals, pencils, arts and crafts, and so on. The teachers have recommended specific goods they've found on Amazon. So naturally, that's where we've gone to get these items.

Amazon's importance and usefulness has only increased. It's practically becoming a backbone of infrastructure in our country.

Demand for online delivery is off the charts. Here are the latest numbers...

Look no further than Amazon's earnings report... Its revenue for the first quarter totaled $75.45 billion, beating the $73.69 billion estimate.

Brian Olsavsky, the company's chief financial officer, said Amazon saw a "major surge" in demand beginning in early March. He noted customer demand still remains high, and the company has hired 175,000 workers to meet it.

Who wants to pay with paper anyway?

To conduct any transaction, one constant exists – payment for services rendered.

Most of us grew up paying in the form of cash, check, or credit card. While all of these methods are still used today, another form of payment is on the rise – electronic payments.

More and more, vendors find it easier to accept electronic payments.

As the outbreak began to take hold in the U.S., my family and I were visiting my wife's parents in Key West, Florida. They spent the month of March in the area, staying at the same place as the past 16 years. We have many of the same routines every time we visit.

But one thing I noticed this time was the look I got whenever I tried to hand cash to a vendor. Everyone gave me and the money I was handing them the "stink eye." It may be the only time in my life I've ever seen someone have a look of disdain for a $20 bill. But whenever I handed them a credit card, they didn't seem to mind at all.

I get it, money is handled by a lot of people and carries a lot of germs. If you want to avoid social contact, dollar bills are not your friend. But with electronic payments, the contact can be avoided completely.

Individuals can tap their credit cards – from Visa (V), American Express (AXP), or Mastercard (MA) – directly on the reader, or they can swipe it through a payment-processing device like those sold by Square (SQ).

Even better, services like PayPal's (PYPL) Venmo or Apple Pay can be used to pay with your mobile phone. PayPal noted the strength in digital-payment trends on its recent conference call...

Its revenue was up 17% in April, transaction volume increased 22%, and the company added 7.4 million new accounts (including mine). In addition, May 1 was its largest transaction day ever.

The 'virtualization' of work and play...

There's more to the remote classroom and work angles that I discussed earlier.

Considering the shelter-in-place orders, it's hard not to find a family that isn't doing this. And all of this requires platforms by which people can connect.

The company that jumps out the most is Zoom Video Communications (ZM)...

Both of my kids' schools use it. My son dials in twice a day for classroom time, while my daughter does so several times a week. And then they both dial in at 7 p.m. to listen to the librarians at my son's school read a couple of children's books before kids go to bed. Each school has added more classes as we go.

Zoom said that during the first three weeks of April, the number of daily participants had increased by 50%. It now has roughly 300 million meeting participants every day.

Other virtual hosting services are seeing an uptake in usage as well. Corporate America is using multiple channels... Skype from Microsoft, Facebook (FB), Webex by Cisco (CSCO), and Slack Technologies (WORK), have all seen increased demand.

In the "streaming" world of entertainment, Disney (DIS) and Netflix (NFLX) have added millions of subscribers...

Prior to its earnings release, Disney had guided for 50 million total subscribers on its Disney+ platform. When the official numbers came out, its subscribers had risen to 54.5 million.

It's a similar story with Netflix... When the company reported results, it said new subscribers had increased by 15.77 million versus the expectation for an additional 7 million.

Finally, companies need to store all of these data somewhere...

All of the services we've mentioned so far are creating the same thing – an increased demand for data and storage. And none of their functions can be done without having somewhere to store all of that information.

Grocery stores need a place to keep data on the inventory of what's available. Movies and TV shows need to be stored so they can be accessed. So does the history of what individuals have purchased in the past and what they may want again.

That's what cloud-services companies provide... They make it easy for every business to operate without having to invest a fortune in server farms and data storage. And it's not only owning that equipment... but servicing it, updating it, and replacing it.

These efforts require time, money, and more people. It's easier to rent space from someone else. Companies like Amazon Web Services, Microsoft's Azure, and server-farm REIT Digital Realty (DLR) are all seeing increased demand.

Already, Microsoft said it has seen a 775% jump in demand for its Teams collaboration service in Italy while social-distance requirements were in effect. Amazon postponed its Prime Day, originally expected to happen in July, likely because it can't handle the extra demand.

Big earnings from Microsoft, Amazon, and Alphabet were a testament to the increased 'cloud' demand...

Microsoft said its Azure unit saw growth of 59%...

Amazon Web Services reported sales growth of 33% in the quarter. It stated it saw "healthy" adoption and usage both in the U.S. and internationally.

And Alphabet said Google Cloud revenue rose 52%.

Then we need security to protect it all...

Of course, as our lives increasingly go online, so does our information...

If you want to grocery shop from afar, go to virtual school or work, watch the newest movie, or pay for anything online, you have to fork over your personal data. And invariably, those company networks get hacked.

With more of this information available, the hackers have to be drooling. It may as well be Christmas...

A friend who works for a cybersecurity firm told me the scams and attempted intrusions are already off the charts. He said because so many people are working from home for the first time, they're even more susceptible to attacks because they don't have business firewalls in place.

It's so bad that criminals are using a fake coronavirus outbreak map that mimics Johns Hopkins University's updates to install malware on personal computers. And these same hackers will see government-relief efforts as bonanzas for theft schemes.

All of this should be to the benefit of cybersecurity companies. F5 Networks (FFIV), for example, exceeded expectations for second-quarter earnings and revenue. Speaking to the recent pickup in business, F5 Networks CEO François Locoh-Donou said...

In the last month of the quarter, we also saw increased demand for capacity as customers looked to quickly and, in some cases, massively scale remote access capabilities to keep their employees safe and their businesses running.

'Normal' won't change these trends...

At some point, "this too shall pass."

Personally, I think the virus is likely to become a seasonal ailment like the flu. It will require a new shot for us to take on an annual basis. But it has changed – and will continue to change – our lives forever.

We often talk about "disruption" in markets and sectors. We want to find the "disruptive" business that creates new and better ways to provide goods and services... or introduces these things to the market.

Today, we're facing a new kind of disruption. The coronavirus is forcing us to create new and better ways of doing "essential" business... and changing how we connect with family and friends.

Common actions like the handshake may no longer be viewed as necessary. Working from home and virtual school will likely see greater usage.

Our lives will be more technology-dedicated. The stock market is reflecting that right now... And the trends we're seeing play out today are also a vision of what's to come.

The question is: Are you prepared?

New 52-week highs (as of 5/6/20): DocuSign (DOCU), Sea Limited (SE), Scotts Miracle-Gro (SMG), and Belo Sun Mining (VNNHF).

In today's mailbag, feedback on Porter's comments in yesterday's Digest on the COVID-19 outbreak and response... and another subscriber spots signs of inflation. Do you have a question or comment? As always, send it to feedback@stansberryresearch.com. As a reminder, we cannot provide individual investment advice, but we do read every note.

"As a subscriber, I particularly enjoy the intellectual honesty of Porter and fortitude of the Stansberry team. I suspect that there are many libertarians in the readership that appreciate civil discourse, so badly needed now. Maybe we should come out of the closet." – Paid-up subscriber Jim M.

"Porter's whole tirade is based on the idea that people will not go back to work because of a government hand out. The USA was built on the idea of an individual's honest days' work and so it will again be so." – Paid-up subscriber James R.

"I have been reading articles that world food inflation is falling... Don't know what grocery stores they have visited. Perhaps they are only looking at what is being paid to the producers of food not what is happening at the grocery stores.

"Live cattle futures 5/6/20 $86.33. 5/6/19 $112.28. Hog futures, $69.98 vs. $82.36. Grocery store prices yesterday in Mo. Ground Beef $2.49 per pound. Year ago $1.29. Pork back ribs $3.49 vs. $2.99. Where is the profit going?

"Fuel costs should be less. Yesterday Gasoline futures @ .96 (up .26 from a month ago), last year $1.77. Of course gas at the pump has not fallen by the same percentage. Looks like major inflation about to rear its head. Big tailwind for gold and silver producers." – Paid-up subscriber Denny B.

All the best,

Corey McLaughlin and C. Scott Garliss
Baltimore, Maryland
May 7, 2020