When the economy is slowing, when it looks like the world is going to come to an end, what do you do?
If you are a portfolio manager, you go and buy the cloud stocks. You pick up some -- or all -- software-as-a-service companies, and you sell everything else.
Now, I have been a huge believer in the cloud stocks, because I am a huge believer in growth. Monday's rally though, takes the cake as the most ringing endorsement of a single group that I can recall.
Before I go into which ones are running, let's talk about why they are running at all so you can spot these kinds of moves.
A rally like this never starts with people waking up and saying, "I want growth." It starts by portfolio managers being struck by how little growth there is in the world.
In this case, the precipitating cause is the coronavirus and how it seems to be in the verge of halting growth in the most important growth economy in the world: China. I know that President Donald Trump has worked his hardest to get our companies to cut back on their use of China, if not eliminate it entirely as a source. There's been real movement there. Nevertheless, we still rely on China for all sorts of goods, from strategic minerals and medicines to things like buttons and trim for clothing. China has infiltrated everywhere to pretty much every aspect of manufacturing, and we are going to see shortages of goods where we never thought there could ever be a shortage.
More important, Europe's growth is very dependent on the Chinese market -- China takes far more goods as a percentage of gross domestic product from Europe than from us -- and that could be another point of weakness. China's growth has been slowing seemingly forever, but slowing to a level that every country in the developed world would love to have. That's going away, at least short term, as we see lots of factories still offline after vacation.
I think many companies that import from China won't initially be hurt. They tend to take down a ton of inventory ahead of the New Year, so they don't run out. So we won't know how bad things are until a week or two. But it will occur. I think it will drive up prices, too, if this pandemic isn't stopped.
Next clue: Oil. The price of oil is very sensitive to Chinese demand, especially given to our improved self-sufficiency. There is a big belief that oil's demand will continue to slow as China's economy grinds to a halt. The long-term demand for oil, often driven by airlines locking in prices, has slackened too.
Now, most of the portfolio managers don't spent a lot of time talking to industrialists and retailers or oil and gas companies as I do. But they don't have to, because they can take their cue from the bond market. They look at the relentless decline in interest rates and that's the signal they need switch to a total growth mode.
Managers have a real advantage. They have just gotten through the bulk of earnings season and they can take stock about what's been the fastest growth trends out there.
Incredibly, and this is the first time I have seen this before, there seems to be only one theme that's resonating right now: the cloud.
Incredibly, and this is the first time I have seen this before, there seems to be only one theme that's resonating right now: the cloud. I totally get that, it's been a bountiful quarter for the cloud. Plus the cloud is uniquely American. The Chinese don't have anything to do with our cloud companies. They are born in the U.S.A., although it's hard to imagine Bruce ever crooning about them.
But this is an insanely positive move and it resonates for many reasons.
First, we actually saw an acceleration in the cloud this quarter. We didn't believe it initially. So when Microsoft's (MSFT) Azure cloud division reported an incredibly strong Azure number, an acceleration to 62%, many hedge funds figured that Azure's win is Amazon (AMZN) Web Service's loss. Nope. Not at all. Sure, it slowed a tad, law of large numbers, but it far exceeded the Street's numbers and, most important, margins expanded. They don't expand when competition is fierce. Amazon's stock had been an underperformer of late, and it became a favored short after the Azure number, but it totally backfired and the stock's been a rocket ship ever since the quarter including today.
Now I know that the Alphabet (GOOGL) quarter was greeted like a bomb went off but it turned out that Google Cloud generated some excellent numbers. Oppenheimer, in a terrific piece, estimates that Google Cloud Platform grew 67% in the year, making it the fastest growing of the three cloud providers. New leadership in the form of an old Oracle star, Thomas Kurian, is bringing in a huge number of $50 million deals, doubling year over year.
OPCO notes that each cloud has its own set of positives, Amazon with depth of product, Azure with hybrid and Google with artificial intelligence and machine learning so they are not competing on price.
But what they will have to compete on is capacity, as demand has exceeded the supply of data centers.
That means portfolio managers are bidding up the two companies most closely related to making parts for the cloud: Advanced Micro Devices (AMD) and Nvidia (NVDA) . Remember when AMD's quarter was supposed to be disappointing? Well that was wrong. The stock's now exceeded where it was when the company reported. Nvidia? What can I say? It reports this week and its entire product line is in strong demand. AMD and Nvdia are vicious competitors when it comes to the cloud. When there is this kind of demand, though who cares?
The cloud theme is so strong that it simply doesn't matter how retail is doing for Amazon, how search is doing for Alphabet and how Windows is doing for Microsoft. Is this the tail wagging the dog? No, I think it's the future dog pulling up the future tail, the legacy businesses that will one day slow down the company's numbers.
When we think of cloud, of course, we think of software as a service. That means ServiceNow (NOW) , Adobe (ADBE) , Workday (WDAY) , VMware (VMW) , Twilio (TWLO) (so much for that disappointment) Splunk (SPLK) and Salesforce.com (CRM) , our cloud kings as well as cloud princes, Coupa COUP, HubSpot (HUBS) , Okta (OKTA) and Atlassian (TEAM) . Our only dud in the group that anointed is New Relic (NEWR) , which has had a definitive slowdown so, on the fly, I am stripping it of its crown and anointing Alteryx (AYX) , one of our favorites that's taking on Excel and winning.
Now, we don't know how long this love will last. You can bet that if we get a cessation of growth of coronavirus infections the ardor will cool and we will see a reversion to many stocks including the semiconductors that are linked to China. We will also see some weakness if the investment banks pump out more cloud stocks, of which there are always many waiting in the wings. But the stink of Caspar (CSPR) the unfriendly IPO, which is down almost two bucks from its $12 pricing just last week, might keep a lid on more IPOs for the moment.
Sometimes stocks fit a theme so perfectly that they can ignite the averages without any other companies really doing anything. That's what's happening Monday. Don't get greedy if you own them. But own at least some of them you must.