Tech Hotspots You Can't Afford to Miss
Technology companies were in the spotlight all week.
Turnarounds, Congress, and Distressed Stocks. In one week, we've gone from SPACs to Congressional hearings about Anti-trust laws. The world of technology is in the spotlight. Again. Technology has been the savior for businesses and consumers during this pandemic. It would not be possible for everyone to work remotely without so much software available today. Tech companies also have done a great job making software affordable for everyone. But this doesn't stop politicians from accusing the Big Tech from breaking anti-trust laws.
Big Tech Hearing
Everyone knows about the Big Four tech brands: Apple, Amazon, Facebook and Google. Competitors want to imitate them and customers are addicted to them. Apple, Amazon, Facebook and Google have each dominated their ecosystems and made billions in profit.
Once you become big enough, small problems become big problems. Each of these companies spend billions on user security, to pay for the best developers and innovate at scale. Amazon focuses specifically on delivering the best products at the lowest cost for customers. Facebook and Google are free tools that have helped organized the world's information to connect all of us. And Apple only produces the absolute best products.
While these companies dominate their fields, no one can say they don't have competition.
Six hours of congressional hearings and I don't think the politicians ever grasped the power of the internet. Technology is constantly changing and the competition seems to get bigger and better every day. Personally I believe these companies are dedicated to making the world a better place with better technology. Today consumers have a choice on what hardware and software they want to use. No one is forcing you buy from the Big Four. The Anti-Trust argument simply isn't strong enough to break up these businesses.
Kodak Almost Went Bankrupt
To speak to the rapid change in innovation, Kodak made a quick turnaround by pivoting industries. Once the film king of camera products, Kodak has now become a manufacturer of generic pharmaceuticals. My first impression was, "how did this happen overnight?" Then I later learned that Kodak has the manufacturing facilities for chemicals to make films. These facilities can be converted for pharmaceutical use. This is a great example of a business who pivoted to survive. So yes, changing your mind can be a strength.
Why do a quick turnaround? Kodak received a $765 million loan to launch Kodak Pharmaceuticals, which will produce generic active pharmaceutical ingredients to reduce America's dependency on foreign drug makers. The company's stock has jumped 500% since its announcement on Tuesday. President Trump blessed the company with a $765m loan under the Defense Production Act.
The Trump administration is adamant about bringing manufacturing back to the United States and this is the first major step. Over the next twelve months I think we'll see a rapid revival of manufacturing in the country. Combined with a possible infrastructure bill, manufacturing can create millions of American jobs and reduce dependency on other countries. The recent supply chain challenges from the pandemic are a good reason to bring back manufacturing.
Distressed Industries You Need to Watch for
The industries with the greatest uncertainty are energy, hospitality, and retail. No surprise here as we see more bankruptcies taking place every single week. My recommendation is to stay cautious when investing in the stock market.
You can buy the S&P 500 Index and hold for ten years but you need the discipline to do this. Buying individual names can be speculative if you are not familiar with the industry economics. We are in the early innings of the Covid crisis. Even with a new stimulus package coming soon, businesses cannot make up for lost sales. The next stimulus bill may not be more than another check.
To summarize, the energy markets will not recover until oil prices stabilize. Renewable energy sources may be on pause until oil is no longer cheaper to consume in business. The travel restrictions are becoming tighter in the U.S. and international travel is limited. Hotels to airlines have large fixed costs and limited upside until restrictions are lifted. We cannot expect the hospitality industry to turnaround until people are comfortable with going out.
And while e-commerce is rising, major retail stores will continue to close down. Major chains will be forced to restructure debts and shut down brick and mortar stores across America. This includes malls and restaurants. The PPP loans will run out and without a full recovery, businesses will not be able to rehire former employees at the moment.
With the U.S. economy shrinking at 32.9% annualized rate this past quarter, local economies are feeling the pain. Along with unemployment benefits exceeding 1 million claims for the 19th straight week. Businesses may pick up this summer but I don't think it will last long. The best investors believe the recovery can take at least two years before returning to pre-Covid levels. Fortunately once the dust settles, some of these distressed companies will become great undervalued investments.
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