“Stay-at-home” stocks, which drove U.S. stock markets to record highs in 2020, have been weak in 2021. These names' sell-off began in Nov. 2020 amid positive news about Pfizer’s and Moderna’s COVID-19 vaccine candidates. However, we've seen some traction after news broke of the omicron variant of COVID-19. Should you sell or hold stay-at-home stocks now that Joe Biden has ruled out lockdowns for the time being?
The COVID-19 pandemic and lockdowns have increased the pace of digitization. While some industries were hit hard by the COVID-19 pandemic, many tech stocks rose to record highs.
What are stay-at-home stocks?
We faced lockdowns worldwide when the COVID-19 pandemic started. As people stayed indoors, demand increased for some products and services. E-commerce stocks Amazon, Etsy, eBay, and Shopify rallied in 2020 as consumers shifted to online shopping. Many people have continued to shop online even after lockdowns have been lifted.
Home service stocks Peloton and Netflix also benefited as consumers' habits changed during the COVID-19 pandemic. Working out at home has replaced going to gyms for some people, while watching Netflix has replaced visiting movie theaters. Teladoc Health and DocuSign have also benefited from the shift.
What are WFH stocks?
An array of WFH (work-from-home) stocks saw a surge in demand in 2020, including Zoom Video Communications, Workday, Twilio, Atlassian, CrowdStrike, and Okta.
Jim Cramer's COVID-19 index rallied in 2020
CNBC's Mad Money host Jim Cramer created the Cramer COVID-19 index, which has 100 stocks across various industries. While the index performed well in 2020, many of its stocks have been under pressure in 2021.
Stay-at-home stocks are slowing down
Stay-at-home stocks are battling slower growth. Amazon, which was among the pandemic winners, has missed its sales estimates for two quarters now, and its Q4 2021 revenue guidance was disappointing. Amazon has been the worst-performing FAANG stock of 2021.
Zoom and Peloton have also tumbled in 2021, languishing near 52-week lows, and Chegg is seeing slower growth as the economy reopens. Meanwhile, old economy stocks, which were weak in 2020, have recovered in 2021 as lockdowns have been lifted.
Stay-at-home stocks rose after identification of the omicron variant
We saw some traction in stay-at-home stocks after news came out of the omicron variant being identified in South Africa. Whereas airline and cruise stocks tumbled, Zoom and stay-at-home peers rose as markets expected them to benefit from new restrictions.
Joe Biden has ruled out lockdowns
Although stay-at-home stocks grew after the omicron news, Joe Biden has ruled out lockdowns for now. The U.S. government is cognizant of the economic costs associated with lockdowns, and the Biden administration is gradually unwinding stimulus programs. New lockdowns would mean reintroducing these programs.
Should you buy, sell, or hold stay-at-home stocks?
While the omicron variant could lead to some restrictions, these might not be as strict as in 2020, as a large part of the U.S. population is vaccinated. Therefore, stay-at-home stocks shouldn't skyrocket as they did in 2020.
That shouldn't rule them out for investors, though. By weighing the stocks' risk-return tradeoff, valuation, and competitive position, investors can identify which stay-at-home stocks to hold and which to sell. Amazon, Zoom, and Teladoc all look like good long-term buys. Despite their slow growth, they look attractively valued.