The Sector Immune to COVID-19

• The COVID-19 crisis has shaped our lives forever, impacting how we live, work and communicate.
• As Nicholas Vardy details today, it has also given a big boost to the technology sector, which people are now relying on much more heavily.

In recent months, I’ve written about how to invest in a crisis.

And I recalled Baron Rothschild’s advice that you should invest “when there is blood in the streets.”

I also cited Sir John Templeton’s contrarian observation “People are always asking me where is the outlook good, but that’s the wrong question… The right question is: Where is the outlook the most miserable?”

Click here to watch Nicholas Vardy’s latest video update.

I have practiced what I preached. I invested in some of the most down-and-out stocks out there. And by going against the herd, I have doubled my money on stocks in sectors others would not touch.

But here’s what has surprised me…

You could have done almost as well by investing in companies where – to use Templeton’s words – the outlook is good.

It turns out COVID-19 was not a crisis for all sectors. Global technology stocks have proved immune to COVID-19.

And understanding the technology sector’s unique role in the post-COVID-19 world is an important factor in your future investment success.

Three Trends in Global Technology Investing

Let’s look at three lessons we learned about technology in the COVID-19 sell-off.

First, the technology sector got a massive boost.

Market leaders like Nasdaq giant Microsoft (Nasdaq: MSFT) have strengthened their market positions immeasurably.

Relatively obscure niche companies like Zoom (Nasdaq: ZM) have seen their values soar.

A sign of Zoom’s success is that it even joined the English language as a new word. Just as you “Google” the internet or “Skype” your friends, you now “Zoom” virtual meetings.

Second, global lockdowns considerably changed how we live and work. And the pace of that change is accelerating.

As COVID-19 spread, the world went remote. People were forced into isolation. Physical interaction outside households became illegal. Everything had to be done from afar.

Many of these changes are likely here to stay.

Physical offices are going online. People are using technology to work, study and communicate anywhere. Vast cloud capability is needed to manage all this economically.

And it is tech companies in all shapes and sizes that will help businesses bring together staff, documents and processes to build virtual offices.

Third, the dominance of U.S. technology impacts global investing.

Europe has few global technology giants. So it’s little surprise, then, that while U.K. and eurozone stocks are down 20% this year, investors in the U.S. tech sector are up about 15%.

The top five U.S. tech companies make up about 20% of the S&P 500. And they have accounted for well over half of the S&P 500’s gains. And there is little hope for the rest of the world’s tech stocks to catch up.

Zoom or no Zoom, the barriers to entry are just too high. And that does not bode well for global investment diversification.

The Case of Microsoft

Microsoft is a classic case of a “winner takes all” tech stock.

Given the company’s market position, it’s hard to imagine Microsoft could ever be dethroned from its dominant perch.

Consider…

The Windows 10 operating system is now on a billion devices. That’s 30% more devices than it was on last year. Microsoft’s Teams software (a rival to Zoom) currently has 75 million users. Everyone is familiar with – and uses – applications such as Word and Excel.

The company’s cloud businesses are beating expectations. It boasts double-digit growth, high cash flows and a $137 billion-plus cash pile.

That raises the question: Is Microsoft the ultimate one-decision stock like Berkshire Hathaway (NYSE: BRK-A) once was?

Warren Buffett doesn’t think so. He has never bought a share of Microsoft for his investment vehicle.

Alas, Berkshire has suffered much for it, as Microsoft has outperformed Berkshire by more than 2-to-1 over the past decade.

Is Tech Froth a Sign of a Top?

Truth be told, I have contrarian instincts as an investor. When all investors are looking in one direction, I force myself to look the opposite way.

So all this talk of tech’s dominance over our investment lives makes me a bit queasy.

For example, Zoom was recently worth more than seven of the world’s biggest airlines.

This reminds me of observations made at the top of the Japanese stock market bubble. Back then, the land under the Tokyo Imperial Palace was said to be worth more than all the real estate in California.

Those kinds of distortions never last. And sure enough, that one also marked the top of the Japanese stock market.

Still, it’s hard to argue with global technology’s newfound importance in both our world and investing. And this megatrend is critical to keep in mind in the years ahead.