Work-From-Home Stocks - Room To Run Or Due For Correction?

The massive market sell-off and subsequent rebound in the wake of the coronavirus shutdown masked multiple different market movements - airlines, travel and banks tanked; large-cap tech (primarily the FANGs) dipped and then recovered with many setting new highs; and a select group of companies servicing the Work-From-Home (WFH) movement surged (most notably Zoom, which is up 260% for the year).

According to FirstRate Data, there has been a tenfold increase in customer demand for analytics on WFH stocks, with the central question being: should the rally in WFH stocks be chased or are they overextended and due for a correction?

 

Work-From-Home stocks - a low-risk investment opportunity?

 

Before considering the likely direction of the WFH stocks it is worth noting that these now exhibit the very interesting property of low (or even negative) betas. Beta is a measure of how volatile a stock is in relation to the broader market - with higher risk stocks having betas above one and low-risk stocks such as utilities having betas below one.

Traditionally mid-cap tech stocks such as the WFH stocks would have very high betas, often close to 2, meaning the returns of these stocks are expected to be a multiple of the returns on the broader index. Since the Covid-19 crisis, however, these stocks are moving contrary to the broader indices and so have low betas often associated with low-risk stocks such as utilities.

For an investor holding a portfolio of diversified stocks, this means the stocks can be added to the portfolio and provide additional returns whilst at the same time reducing portfolio volatility (note that these low betas are likely a temporary phenomenon and would be unlikely to last over six months).

 

Are Work-From-Home stocks already overbought?

 

In terms of technicals, most WFH stocks look very stretched - for example, the stochastic oscillator for Zoom (ZM), Slack (WORK), Peloton (PTON) and Shopify (SHOP) are all above 80, indicating the stocks are extremely overbought. In addition, there is significant headline risk in the WFH cohort, note the 5-10% selloff on the mildly optimistic news of an early-stage vaccine in mid-May.

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Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") ...

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