Growth Stocks Getting Hammered: Buying Opportunity

Monday was a strong day for many sectors in the market due to the news about the Pfizer (NYSE: PFE)/BioNTech (NASDAQ: BNTX) vaccine. But the gap in performance across different areas was quite staggering, while the SPDR S&P 500 (SPY) gained 1.26%, the growth-oriented Invesco QQQ (QQQ) declined by 2.04% during the day.

Some high growth stocks suffered huge losses, for example, Zoom (ZM) was down by a staggering 17.4% as traders moved away from the stay at home beneficiaries in other to buy airlines, cyclical, and other sectors that benefit more directly from a vaccine in the short term.

In this context, it makes sense for investors to wonder if they should rotate out of growth stocks in order to buy the more cyclical sectors or if they should instead focus on hunting for opportunities among the most attractive growth stocks that are pulling back due to the vaccine news.

Your overall strategy always depends on your timeframe, risk tolerance level, and other specific needs. However, if you have a long-term horizon, sticking with the best companies in the world that offer superior growth prospects will probably produce much stronger returns than trying to catch the rebound in cyclical names over the short term.

The Fundamental Drivers Are Not Going Anywhere

High growth companies are many times benefitting from major long-term trends. Online commerce, fintech, programmatic advertising, and Artificial Intelligence are some of the notable examples of key growth drivers that are still offering enormous opportunities for expansion.

These trends have been in place well before the pandemic, demand has accelerated in recent months, but these secular tailwinds will continue producing abundant growth opportunities over the years to come.

We can expect the recent acceleration in demand to slow down after we go back to normal due to the vaccine. But we always knew about this, nobody was expecting the lockdowns or the work from home policies to last forever in full force. It is obviously great to know that the vaccine is advancing rapidly, but nothing big has changed in this area due to the vaccine news.

Interestingly, traders and short-term speculators have been aggressively selling growth leaders due to the news on Monday. This kind of behavior does not make any sense when considering the main fundamental drivers behind these businesses.

Amazon (AMZN) stock was down by over 5% on Monday, which is a large move coming from such a gigantic company. It is like some traders are assuming that consumers are going to go back to waiting in line at brick and mortar stores and that the cloud computing infrastructure services from AWS will no longer be required after we have a vaccine.

Sure, you can make the case that some people may want to go back to physical stores if they want to buy clothes that they have to try on, or perhaps handpicking some fresh vegetables.

However, Amazon offers unparalleled convenience and aggressively competitive prices. Amazon is in fact the most valuable brand in the world, and there is no vaccine against the power of brands as a key source of competitive strength in consumer-facing businesses.

Besides, the analysts following the stock are already expecting a slowdown in revenue growth for 2021 in comparison to 2020. The stock price is already incorporating expectations for a deceleration after the pandemic is over, so it doesn't make much sense to see the stock selling off on encouraging vaccine news.

Source: Seeking Alpha

PayPal (PYPL) also went down by 8.9% on Monday. The fact that the company delivered an excellent quarter with accelerating payment volume in the third quarter of 2020 apparently does not matter anymore. I guess some traders are assuming that we are all going to go back to the metal coins of the Roman Empire after the vaccine, but that is not a bet that I am willing to make.

PayPal's digital wallet, Venmo, registered 65 million users driving $44.3 billion in TPV during the third quarter, up 61% year-over-year. Management is forecasting revenue for Venmo to approach $900 million in 2021.

These numbers are indicating that digital wallets are here to stay, and PayPal is both a key driver and a major beneficiary from this trend. The bigger the size of the platform, the more valuable it is for all users, and Venmo has already reached escape velocity due to its size.

For some reason, CrowdStrike (CRWD) was down 10.75% in a single day on news of the vaccine. I truly can't speak for the traders who decided to sell the stock on Monday, but perhaps they are now expecting cybercrime to decline as professional criminals will be spending most of their time smelling the flowers in the woods after getting vaccinated. Anything is possible, but this doesn't sound like a very plausible scenario to me.

The numbers, on the other hand, are showing that CrowdStrike was growing at a rapid rate before we even knew that the pandemic was coming, and it will most probably keep delivering solid performance after the vaccine.

Source: CrowStrike

CrowdStrike's cloud-native Falcon platform uses Artificial Intelligence to learn from the data it collects. When a client gets attacked, the company gathers information from that attack and learns from it, generating better solutions for all of CrowdStrike clients based on one single event experienced by one client. This smart business model is a key source of strength for CrowdStrike, and it is not going anywhere due to the vaccine.

Time Is The Friend Of The Wonderful Business

It is easy to see how a vaccine can be more relevant for an airline or a restaurant than for an e-commerce company or an endpoint security provider. Make no mistake, though, a vaccine means more freedom and economic activity, increased consumer spending, and more corporate investing. Over the middle term, a vaccine is also good for the high growth companies that have shown their resiliency during the pandemic.

Since many high-quality growth stocks have widely outperformed the market in 2020, some rotation into other sectors would be no surprise, and it would even be healthy to some degree. However, trying to chase those kinds of short-term market moves can do more harm than good to your returns. Having a long-term horizon is a much sounder and more reliable strategy to maximize performance.

Warren Buffett famously said that time is the friend of the wonderful business and the enemy of the mediocre. In the short term, perhaps you can make more money in airlines and big banks than in digital payments and e-commerce companies. "Perhaps" is a keyword in the prior sentence, because you never know for how long the rotation can last or how strong it is going to be.

Over the long term, meaning 3 to 5 years, things look very different, though. Chances are that companies with superior revenue growth and expanding profit margins will substantially outperform those that are the bigger beneficiaries of a vaccine nowadays. The longer your time horizon, the larger the chances that a high-quality stock is going to outperform a mediocre business over the holding period.

There are many things that we can't control as investors, and the short-term sector rotation based on the news is one of those things. It is probably much better to focus on variables that we can actually control, such as our behavior. This means having a long-term horizon and focusing on the big picture over the short-term shifts in market sentiment.