Volatility in the stock market often means opportunity, and that rule of thumb has been clearly borne out this year.
The COVID-19 pandemic has posed a number of challenges for investors and businesses, but it's also created some big winners, especially among tech companies like Zoom Video Communications (ZM -1.20%) and Shopify (SHOP -0.04%), share prices of which have surged as demand for the services they provide has soared.
These coronavirus-buoyed stocks should continue to have advantages, but many of them are already trading at sky-high valuations, adding to the risk of a pullback if their growth doesn't materialize as expected.
That means that the best stocks for investors to buy right now are those that can benefit from similar trends that are being accelerated by the pandemic, but that haven't already experienced significant gains. Two stocks in particular that look ripe for this kind of growth are Stitch Fix (SFIX -2.51%) and Roku (ROKU -2.93%).
Image source: Stitch Fix.
Stitch Fix: An overlooked e-commerce stock
Stitch Fix sits at the intersection of two businesses moving in sharply different directions due to the pandemic. There's e-commerce, which is experiencing historically rapid growth with so many stores closed, and apparel, which is undergoing an epic collapse as, again, stores are closed and consumers have little reason to buy new clothes at a time when most are working from home and social events have generally been canceled.
Because of its position as an online personal styling service, Stitch Fix has largely missed out on the rally in e-commerce stocks that have propelled Shopify, Wayfair, Amazon, and others to big gains this year. That's not surprising as Stitch Fix has been negatively impacted by the pandemic, and posted a loss in its most recent quarter with a decline in revenue. There's no question that the apparel industry is suffering: Sales at clothing stores were down 87% year over year in April and down 63% in May, according to the Census Bureau.
Stitch Fix stock has climbed in recent weeks and it's now near a 52-week high, but it's still more than 40% below the all-time high it set in 2018. There are signs that the recent rally could have legs.
In the earnings call for its fiscal fourth quarter, which ended May 2, the company said that it had returned to sales growth in May, and that its large base of auto-ship customers had continued to order clothes throughout the crisis, buoying the overall business. That core group of regular customers and a model that allows people to try on clothes in the comfort of their own homes before deciding what items they want to keep gives it an advantage over its brick-and-mortar rivals.
Those competitors are now in retreat, and many are declaring bankruptcy or closing stores, putting billions of dollars of market share in the apparel industry up for grabs. CEO Katrina Lake noted a "huge market share capture opportunity" from the crisis on the earnings call.
Clothes shopping will rebound as the economy normalizes, and Stitch Fix should be a big winner with competition thinned out and e-commerce experiencing secular growth. As the market realizes that and as the company's growth backs it up, this stock should continue to climb higher.
Image source: Roku.
Roku: Riding the streaming revolution
Video streaming has been one of the biggest winners during this crisis. With consumers spending more time at home, viewing times have spiked. Content originally intended for movie theaters has been redirected for home viewing, and the traditional cable ecosystem is taking a hit as advertisers pull spending from linear television.
Roku looks set to benefit from all of these trends, which should accelerate the shift from linear to internet television. While Roku stock has historically been a big winner, and other streaming heavyweights like Netflix have seen big gains in 2020, Roku shares are actually down slightly year to date, essentially in line with the S&P 500.
The company has experienced challenges from the advertising pullback, but it's also seen viewing hours explode, a promising sign for the future. Streaming hours on the platform jumped 80% in the first quarter with viewing hours up 30% per subscriber, showing the pandemic has boosted consumption.
Roku is the market-share leader in connected TV platforms with 39% as of 2019, according to Parks Associates, and its status as a neutral platform and its partnerships with TV makers like TCL have given it an advantage over tech giants like Amazon and Google.
Connected TV looks poised to surge in the back half of the year with the recent launch of HBOMax and the upcoming debut of Comcast's free, ad-driven streaming service, Peacock, which could make a big splash. The technology offers clear benefits to advertisers over traditional TV as it allows for better ad targeting and greater return on investment. Advertisers like the way television serves up video ads to an engaged audience, giving Roku a potential advantage over social media outlets, and the recent Facebook ad boycott could also help drive advertisers into Roku's arms.
Like Stitch Fix, Roku is facing near-term challenges as the ad market has softened as the recession has taken hold, but advertisers will come back, and as they do, it should be a big winner.
