Stay-at-home stocks outperformed the markets by a big margin in 2020. CNBC’s Mad Money host Jim Cramer even came up with a COVID-19 Index in 2020. The index includes stay-at-home stocks and other companies that could benefit from lockdowns and economic turmoil.
Cramer expects more lockdowns amid soaring COVID-19 infections. He expects stay-at-home stocks to outperform again after their brief underperformance since November. Should you buy stay-at-home stocks now like Cramer recommends?
Stay-at-home stocks have come off their 2020 highs for multiple reasons. First, hopes about the COVID-19 vaccine rollout triggered a sector rotation from tech to cyclical stocks. Second, markets are weighing whether the strong growth that tech companies reported in 2020 could be sustained in 2021 as well. Many stay-at-home stocks' valuations seemed to price supernormal growth for many more years.
What are stay-at-home stocks?
When the COVID-19 pandemic started to spread globally in March, most countries imposed lockdowns to contain the spread of the deadly virus. Since people were confined to their homes, their consumption patterns also changed. For many people, online shopping replaced a visit to the mall, while Zoom calls replaced corporate meetings.
The demand for streaming services offered by companies like Disney and Netflix also soared. Home entertainment replaced going to movie theaters. Peloton stock soared as many people bought the company's exercise equipment instead of going to public gyms.
What does Jim Cramer expect from stay-at-home stocks in 2021?
Cyclical stocks have outperformed stay-at-home stocks since the positive trial results for Moderna’s and Pfizer’s COVID-19 vaccine candidates were announced. Cramer expects that stay-at-home stocks will resume their leadership because he sees an imminent lockdown.
“Nobody wants to shut down the economy … even partially, but with infections exploding, hospitals overwhelmed and a horrifying death toll, even the Covid doubters who think that it was just a hoax are starting to take the virus seriously,” said Cramer on his show.
If there are lockdowns like Cramer expects, stay-at-home stocks could start outperforming again. He gave Amazon as an example. The stock has underperformed the S&P 500 for three months now after hitting record highs.
Which stay-at-home stocks does Cramer recommend?
Cramer, who coined the acronym "FAANG," which includes Facebook, Apple, Amazon, Netflix, and Google, came up with his COVID-19 Index earlier in 2020. Stay-at-home stocks and companies benefit from economic turmoil and changes in consumer behavior. Cramer’s COVID-19 Index has 98 stocks spread across diverse industries.
Cramer sees FAANG stocks and semiconductor stocks outperforming amid the shift towards stay-at-home stocks. He also sees digital facilitators doing well including Twilio, DocuSign, Slack, and Zoom Video Communications. Cramer listed Netflix, Peloton, Shopify, and Adobe as good stay-at-home stocks amid soaring COVID-19 cases.
Are stay-at-home stocks here to stay?
There has been a digital transformation in 2020 due to lockdowns and more people have embraced technology. How much of the transformation will stick when the COVID-19 pandemic ends? Will Zoom calls replace corporate travel and will home entertainment lead to movie theaters' demise?
Some transformation looks like it's here to stay. For example, the COVID-19 pandemic has accelerated the shift towards online shopping. Many people who shifted to online shopping might continue to do so even after the COVID-19 pandemic ends. Similarly, home entertainment is here to stay. While it wouldn’t lead to a total demise of movie theaters, movie production houses like HBO, Warner Bros, and Disney are focusing on streaming, which is a sign that streaming is here to stay.
Many companies might continue to let more people work from home after the COVID-19 pandemic ends, which would lead to lower costs for employers in terms of office rentals. Employees would have the flexibility to keep working from home. Work-from-home stocks could also be winners in the long term even though there are concerns about their exorbitant valuations.