Will some tech stocks boom during social distancing?

While the S&P 500 has lost around 30 per cent of its value in the last month, Zoom, the video conferencing company, saw its stock value rise 101 per cent. Though there was a sharp adjustment yesterday, the tech company is clearly reaping benefits as a tool for businesses, universities, and even families to keep functioning in an era of social distancing.

Paul MacDonald, CIO of Harvest Portfolios, and James Learmonth, portfolio manager at Harvest responsible for their Tech Achievers Growth & Income ETF (HTA), explained why companies like Zoom and DocuSign have soared while markets have crashed. They shared how Harvest is delivering on its promise of income to investors through covered call strategies and explained how some of the tech companies supporting a more remote, socially distant world may prove to be long-term growth leaders.

“When, like now, there’s a systemic shock that’s hitting everything, people start looking for those ‘story stocks,’ companies that might provide kind of a port in the storm,” Learmonth told WP. “When we look at companies like Zoom or DocuSign, there’s been a long-term shift towards flexible work arrangements. But obviously with Covid-19, it’s really accelerated this shift in a very short period. Companies like Zoom and DocuSign, whose main value proposition is trying to facilitate remote collaboration are likely to see a pretty dramatic benefit, at least in the short term. They see a large influx of new users and add existing users who are using it on a wider scale.

“The key question is really, for any of these story stocks, how sustainable is this boost going to be in the longer term.”

Learmonth and MacDonald see the potential for companies like Zoom to deliver in the long term as it appears the coronavirus outbreak has only accelerated a wider shift in workplaces towards remote and flexible solutions. They’re aware, though, that stories create bubbles and the stock values will correct as stories subside, as we saw in Zoom’s 15% decline on Tuesday. Their focus, as it has always been, is on delivering income to their investors.

The class A of Harvest’s HTA fund was down around 30.5 per cent on Monday from the market peak of February 19. That’s 50 basis points better than the S&P 500 tech sector, down 31 per cent, and 3 per cent better than the equally weighted S&P 500 tech sector which is down around 33.5 per cent. Learmonth explained that through a focus on larger cap companies and a diversified basket of tech stocks they’re outperforming the falling market. More crucial for their investors, though, the Harvest covered-call strategy is paying out income.

Learmonth explained that the HTA fund employs an active covered-call strategy reconstituted on a quarterly basis with 20 large cap tech names, equally weighted. In the past few months, as the coronavirus spread outside of China, they’ve been writing their call options at more aggressive levels, selling call options at levels well above what’s needed to meet Harvest’s distribution requirements.

At the same time HTA is set up to benefit from the long-term shift to cloud-based infrastructure that Learmonth and MacDonald both see. HTA is invested in companies focused on software and service models like Microsoft, Adobe, and salesforce.com. As well, they’re investing in companies like Intel and Cisco that will benefit from increased spending on data centres. They’re looking at hidden gems, too, like Akamai Technologies which provides solutions streamlining high quantity and quality data transfers. Some of their bigger customers are the streaming services we’re all leaning on for entertainment while social distancing.

“The tech sector has led for most of this cycle,” Harvest CIO Paul MacDonald explained. “In this correction that leadership has been muted, but as we enter a new normal, I don’t think there’s any question that technology will play an equivalent if not a more important role in our day to day lives. I think as the bottom is found in the market tech will resume that leadership.”

MacDonald explained that Harvest prides itself on operational agility and has been able to quickly move its investment management teams remote and ready to take advantage of any opportunities they see. Their covered-call strategy is benefitting from market volatility, but it requires a dedicated team executing and monitoring on a regular basis. They’re positioned to keep doing exactly that, using volatility to deliver income.

Overall, MacDonald and Learmonth believe their strategy picking long-term winners and generating income through covered calls is the best suited for this era of high volatility.

“We’re in the heat of the heat of the moment now,” MacDonald said. “But we have confidence in the companies within all of our portfolios. The way we’ve established our mandate is to really own best in class, high-quality companies. When the markets going straight up, we’re gonna lag a little bit but when the market comes down we’re comfortable with how they’re positioned for this environment.”