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We look at the unsung heroes of the rally in the S&P 500
Thursday 19 Nov 2020 Author: Steven Frazer

The coronavirus pandemic has provided the world with its toughest stress test in more than 80 years. People across the globe have embraced the promise of a hitherto elusive vaccine, sending stocks around the world racing higher.

The victory of Joe Biden in the race to occupy the White House hot seat for the next four years has also fuelled market optimism, but not all recoveries have been equal.

While the UK benchmark FTSE 100’s November rally has seen the index jump an impressive 12.9% (to 13 November), beating major US markets (S&P 500 +8.2%, Nasdaq Composite +7.3%), this relative outperformance over our across the pond cousins is a rarity in 2020.

The FTSE 100 is still more than 15% below its pre-Covid levels, using 20 February as the date when investors really began to price in a material impact from the pandemic. That compares poorly with US markets, which have stormed back from the pandemic sell-off to set new all-time highs this autumn.

CLOSE TO ALL-TIME PEAKS

On 13 November the Nasdaq Composite was just 2.9% off its 12,056 high set in early September, despite the mild sell-off in top tech names as investors chase growth at cheaper prices in a more normal future. The S&P 500 stands barely 1.2% below its all-time 3,581 high.

This shouldn’t really surprise anyone. The US remains home to many of the worlds’ biggest and best technology companies that have been able to leverage their digital platforms and cloud delivery to keep millions productive in work, entertained at home and in touch with friends and family through the pandemic and its resultant lockdowns.

The likes of Amazon and Netflix, part of the FAANG stocks alongside Google parent Alphabet, Apple and Facebook, have made hay during the mayhem, driving the surge in the S&P 500 this year. And little wonder - throw in Microsoft and these six tech stocks have average a 44% gain in 2020, led by Amazon. Alphabet is the worst performer, yet is still up 28% this year.

Together these six stocks are now worth almost $7.4 trillion, or 23.8% of the S&P’s $31 trillion market cap.

FAANGS’ TOOTHLESS RELATIVE PERFORMANCE

Perhaps surprisingly, only Amazon and PayPal of these now familiar names are among the 10 best performing S&P 500 stocks of 2020, yet more than half of the top 10 are tech of one stripe of another (including healthcare or biotech), or beneficiaries from tech themes – the 77.1% rally in FedEx shares this year owes much to escalating home delivery of products bought online.

But the performance of the top 10 stocks since the market’s coronavirus nadir on 23 March eclipses these numbers, with all more than doubling, while four names have trebled or more.

Some of these names will be well-known to UK investors, some will remain enigmatic, while recognition of others will emerge as familiar brands are revealed.

Investors will know the names listed earlier, while the likes of fashion chain Gap, white goods manufacturer Whirlpool, and US stalwarts like General Electric and General Motors will be
very familiar.

Some individuals may also recognise microchips firms NVIDIA and Advanced Micro Devices, oil services giants Halliburton and Baker Hughes, and probably media and entertainment colossus ViacomCBS, which owns the CBS TV network in the US, film studio Paramount Pictures and cable channels MTV, Nickelodeon and Comedy Central.

FAMILIAR MYSTERY STOCKS

Retailer L Brands is an interesting stock that many investors don’t know they know. It operates hundreds of largely shopping mall-based outlets around the world and a busy internet operation selling fancy women’s nightwear and underwear, other clothing lines, plus personal care, beauty and home fragrance products.

The company’s shares have soared this year, rallying 88.6% in 2020 and 273% since the market bottom, the top S&P performer over that time frame. After its run the stock trades on a 12-month rolling price to earnings (PE) multiple of 16, according to Refinitiv data.

Why it has performed so well may be partly revealed by the idenity of its store chains which include Victoria’s Secret, La Senza, PINK and Bath & Body Works, the sort of product lines that largely transfer well to online sales.

Align Technology operates in dental technology, a field that has recovered from the dental practice closures earlier in the year.

It specialises in computer-aided design/computer-aided manufacturing (CAD/CAM) digital scanners for dentistry (making dentures, for example), intra-oral scanners, orthodontics and cosmetic teeth alignment tools.

The business saw the inevitable drop-off in Q2 revenues in the teeth of the lockdown, leading to a $27.6 million quarterly net loss, but it has rapidly recovered. Net income hit $177.9 million in Q3, building on its first quarter level of $57.9 million.

With optimism of a return to some sort of normality sparking a string run for global stock markets this month, other previously bombed out stocks like Align have staged a bounce, such as Coty. It is the perfumes and cosmetics business behind Calvin Klein, Marc Jacobs, Davidoff, Rimmel, Beyonce and, since July’s decision to buy a 20% stake, Kim Kardashian’s cosmetics brand.

A massive loser since the start of 2020, plunging 60%-odd, the stock has rallied strongly in recent weeks – up 55% since 4 November, suggesting a retail re-opening bounce. For some businesses that rely on the personal touch, online is a poor substitute for in-store pampering.

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