Fasten your seatbelts, folks, because the stock market has been on one heck of an emotional roller-coaster over much of the past four months. Initially, panic and uncertainty tied to the coronavirus disease 2019 (COVID-19) pandemic sent the broad-based S&P 500 down 34% in less than five weeks. But in the subsequent 11 weeks, we've witnessed roughly 80% of this initial drop clawed back by equities, with Wall Street appearing to enter a new bull market.
Although swoons in the stock market are inevitable, history has decisively shown that opportunistic long-term investors who buy during these periods of weakness tend to make money. It's never really a question of whether you should invest when a new bull market emerges, but where you should park your capital.
Assuming a new bull market has been established, the following four industries look set to thrive (and dominate) for a long time to come.
One of the bigger beneficiaries of the COVID-19 pandemic is cybersecurity. To be perfectly clear, cybersecurity was already growing at a healthy pace well before the coronavirus shut down nonessential businesses across much of the country. But with more employees being forced to work remotely than ever before, the need to secure cloud-based data is taking on added importance. Essentially, COVID-19 took an existing trend and gave it a shot of adrenaline.
Hands down, my favorite company in this space is Palo Alto Networks (PANW 2.14%), which I pegged on April 9, 2020, as one of five stocks that could be a 10-bagger (i.e., deliver 1,000%-plus returns) by 2030.
Aside from the fact that enterprise cloud demand continues to pick up, Palo Alto benefits from the fact that it's pushing subscription and support-based solutions as opposed to hardware. Subscriptions generate much better margins than hardware, and cash flow is far more predictable as Palo Alto is unlikely to see customer churn for what's effectively a basic-need service for any business.
Over the past year, Palo Alto's subscription and support revenue has grown to account for 68% of total sales, up from approximately 62% in the prior-year quarter.
Building off of cybersecurity, the hottest thing since sliced bread in the new bull market is going to be anything having to do with cloud computing. This could mean the infrastructure players that are responsible for aiding businesses in creating their cloud, platform-as-a-service providers that allow enterprises to build, manage, and deploy applications, and software-as-a-service companies, which operate and sell ready-to-use apps for businesses and consumers.
Interestingly, some of the most prominent names in the cloud space are the United States' largest publicly traded companies: Amazon (AMZN -0.16%) with Amazon Web Services (AWS), Microsoft with Azure, and Alphabet with Google Cloud.
I don't see how investors can't get excited about Amazon in the new bull market. Even putting aside its e-commerce dominance, AWS continues to grow at about twice the pace of its retail/ad operations, and it produces considerably better margins. With Amazon's cloud services now accounting for 13.5% of total sales in Q1 2020 and a majority of its operating income, it's no wonder Wall Street expects a near-tripling in the company's operating cash flow by 2023.
The new bull market will also feature an ongoing push toward personalized medicine. By personalized medicine, I'm referring to the idea of tailoring treatment for each individual rather than offering generalized medical solutions. Most personalized medicine leans on the increased use of technology, the cloud, and innovative new devices.
For example, another 10-bagger stock I singled out in April is Livongo Health (LVGO), a provider of personalized health solutions. Using mountains of collected data and artificial intelligence, Livongo sends tips to members with diabetes in order to help them make meaningful behavioral changes that result in them living longer and healthier lives. It also doesn't hurt that Livongo's solutions can potentially work hand in hand with other wireless diabetes devices (e.g., insulin pumps), meaning patients don't have to leave the comfort of their homes to convey sensitive data to their physicians.
Maybe the best thing about Livongo Health and the personalized medicine push is that it's not all talk. Livongo's Diabetes member count doubled from the prior-year quarter to more than 328,000, and it's already generated two consecutive quarters of profitability despite significant reinvestment into its solutions.
If Livongo is already turning the corner to profitability with less than 1% of U.S. diabetes market share, just imagine its potential when it expands to treat other chronic illnesses, like hypertension.
Internet of Things
Finally, look for the Internet of Things (IoT) to finally realize its full potential in the new bull market. By IoT, I'm talking about wireless devices being able to connect and communicate with one another and data centers. Examples might include a smart thermostat that learns your heating and cooling preferences to conserve energy usage in your home, or an automobile that automatically reorders a defective or soon-to-be-defective component.
It's not uncommon for Wall Street and investors to overestimate the impact of new technology and be left disappointed. This is sort of what happened with IoT stocks in the latter half of the 2010s. But with an increased reliance on work-from-home, the cloud, and even personalized medicine, the value of IoT is rising like never before.
To build off of the previous industry (personalized medicine), DexCom (DXCM -0.57%) is the perfect example of IoT in action. Dexcom, which happens to have a deal in place with Livongo Health, is a producer of continuous glucose monitoring devices for diabetics. DexCom's devices can provide patients with real-time blood-glucose levels, communicate with insulin pumps to administer or hold off on the administration of insulin, and aid in producing reports that can be sent to a primary care provider.
IoT has applications in virtually every industry, and the new bull market should showcase that fact.