Stocks to buy now: The 'overlooked' tech portfolio

This article is part of Fortune‘s quarterly investment guide for Q1 2021.

If there was anything in 2020 that went better than expected, it was the stock market. Mike Lippert can attest to that. The manager of the Baron Opportunity Fund remembers feeling in April the bleak dread of recession. Instead, his fund returned roughly 90% last year—his best performance to date, and perhaps, Lippert thinks, his best ever. “I am very realistic that it’s a career year,” he says.

But Lippert doesn’t owe his outsize returns to any major dip-buying back in March, during the blink-and-you-missed-it bear market. Rather, his best bets had been years in the making—including a huge stake in Tesla (up 743% in 2020), as well as holdings in Netflix, and, of course, Zoom. “We were investing in mostly digital trends, and they became must-haves, must-dos during the pandemic,” explains Lippert.

It’s a lesson that has increasingly been borne out in the past decade: Many tech companies have proved they are much less sensitive to downturns than anyone thought, while any company that’s not on a digital trajectory puts its investors at risk. Put another way, if you want to make money in today’s market, why own anything but technology stocks? “A lot of these technology companies have become the consumer staples of today,” says Sonu Kalra, manager of the $48.4 billion Fidelity Blue Chip Growth Fund. “They’ve become an ingrained part of our lives.” Besides Amazon, he’s recently bought more of other Big Tech companies including Apple, Alphabet, and Facebook.

Still, with most of the “FAAMG” companies valued at upwards of $1 trillion apiece, the math just makes it harder for them to continue delivering the multi-bagger returns investors strive for. That’s why growth-oriented investors are now looking for gains from a younger generation of companies that are similarly promising to change the way we live and work (from finance to entertainment), but with more potential to get a lot bigger—and that perhaps haven’t zoomed quite as much lately.

Indeed, with many tech stocks already trading at all-time highs, money managers are looking past valuations and prizing solid balance sheets over bargains—particularly as risks abound with much of the economy (see travel and hospitality) still in tatters. “Pretty much every good company trades at a high valuation today,” says Lippert. Rather than reshuffling their portfolios to benefit from an economic recovery in 2021, investors are wagering on continued growth streaks of innovative companies (which may still accelerate as the coronavirus wanes). “We believe winners can keep winning for a very long period of time,” says Rebecca Irwin, comanager of the PGIM Jennison Focused Growth Fund, which was up more than 67% last year.

Still, Lippert has been paring his highest-flyers while building up positions in other stocks that have gone more overlooked. “We love Zoom Video, but they’re not going to grow as fast in 2021 as they did in 2020; it’s literally impossible,” he says. Lately, he’s been buying Workday, which also helps enable large workforces to function remotely with its HR and finance management software, as well as Guidewire Software, whose cloud tech is digitizing the property and casualty insurance industry. Both companies lagged the tech sector last year as their clients put big enterprise software deals on hold, but Lippert thinks both stocks will double over the next four years as corporate spending bounces back. “I’m not arguing these are cheap companies,” he says—they trade at 84 times and 574 times estimated 2021 earnings, respectively—“but I believe we can make double-digit long-term returns.”

Meanwhile, Alan Tu, manager of the $8.6 billion T. Rowe Price Global Technology Fund, which returned more than 75% last year, has been sorting out “COVID winners” from what he calls “COVID imposters”—companies whose success will fade with the coronavirus. In the winning camp he puts Twilio, the company behind most of those text message alerts that now notify you whenever your Uber is outside, when your takeout order is ready for pickup, or when it’s time to vote for your candidate. Twilio’s stock price more than tripled in 2020, giving it a $60 billion market cap, but “you can kind of get this feeling that we’re just scratching the surface, now that this digital relationship has been established,” says Tu.

Likewise, Fidelity’s Kalra thinks certain quarantine-inspired behaviors will last even when people go back to the office. That’s why he has recently stocked up on Wayfair, the online furniture and decor retailer. “My sense is that my appreciation for my house will continue post-pandemic as well,” he says. That’s not all that’s changed for Wayfair this past year: The e-commerce company turned its first profit in the second quarter of 2020 and has continued the streak since.

Meanwhile, other companies that survived the pandemic with minimal damage will likely also get a boost as normality returns. Natasha Kuhlkin, comanager of the PGIM Jennison Focused Growth Fund, is fond of Match Group, whose portfolio of more than 40 online dating communities spans from millennial- and Gen Z-focused Tinder to those for people pushing middle age. While roughly 40% of heterosexual couples now meet online (up from 5% two decades ago), according to a 2019 Stanford study, that’s still increasing: Kuhlkin estimates Match’s revenue grew nearly 20% last year, despite the damper that masks and contagion put on dating. With new video features in some of Match’s apps, there’s even more potential when romance returns as a less dangerous undertaking: “We do expect some reacceleration,” says Kuhlkin.

And, eventually, couples will want somewhere to go on dates again, one reason why Dan Chung, CEO and chief investment officer of asset manager Alger, sees opportunity in restaurants like Shake Shack. While COVID shuttered many eateries, chains have fared relatively better, especially those that leaned into online ordering and delivery. Digital orders now make up nearly 60% of Shake Shack’s sales, which were actually 4% higher overall in the final quarter of 2020 than the year before—despite the fact that many of the burger joint’s locations remain closed. Even if online ordering shrinks to half that proportion of Shake Shack’s sales once people can dine out again, “it’s going to be 30% of a company that’s growing really rapidly,” says Chung.

Underpinning restaurants’ and other shops’ ability to shift so quickly to e-commerce are the digital payments companies. But that’s just one part of the business at Square, which is benefiting from an explosion in use of its product Cash App, its payments feature that allowed people to receive their stimulus check digitally as well as trade stocks and Bitcoin on their phone during the pandemic. “I don’t think you’d see us owning a traditional financial institution—they just don’t have the growth prospects that really intrigue us,” says Irwin of PGIM Jennison.

Of course, with the world’s gaze on vaccines, no tech portfolio would be complete without health care. Alger’s Chung is currently investing in a handful of companies that supply the tools and materials to develop mRNA-based drugs, a therapeutic technology rich with research potential after the success of vaccine makers like Moderna. “We actually like the picks and shovels way to play this, as opposed to trying to bet on which miner will hit gold,” says Chung. That’s why he owns Massachusetts-based Repligen, whose equipment is used to produce and test biologic drugs, as well as Minneapolis firm Bio-Techne, which supplies proteins and special molecules from antibodies to reagents to pharmaceutical research labs. “We sometimes call these compounders,” Chung says. “This isn’t going to be the fastest-growing company in the universe, but we think it’s going to continue to be a nice, steady growth company for a number of years.”

If your appetite is for steady growth, look no further than China, the only major economy that managed to grow in 2020. And if the pandemic sped up the shift to e-commerce in the U.S., it did so even more acutely in China, where a lack of major chain retailers combined with a dearth of storage space in small homes has long necessitated more frequent store runs, a particular inconvenience given heavy traffic congestion and then, the virus, says Fidelity’s Kalra. “So when you put all those things together, the benefits of e-commerce are actually greater in China,” he says. Besides Chinese shopping giant Alibaba, he’s been buying lesser-known Pinduoduo, a growing e-commerce seller in China’s midsize cities. (Pinduoduo, whose stock nearly quintupled last year, in August replaced NetApp in the Nasdaq 100.)

For a counterpart in Latin America, Irwin favors the region’s largest e-commerce player, Argentina-based MercadoLibre, which has also built a fintech business for paying and lending that’s flourishing in places like Brazil. T. Rowe’s Tu, meanwhile, is betting on Singapore’s Sea, a major e-commerce force in Southeast Asia that also makes a viral video game akin to Epic’s Fortnite, as well as (what else?) a digital payments business that has taken off during the pandemic. There’s a reason the NYSE-listed stock is now Tu’s top holding, right above Amazon. “A company like Sea has elements of Amazon in its earlier years,” says Tu. Investors would be smart to own both.

This article appears in the February/March 2021 issue of Fortune with the headline, “The overlooked tech portfolio.”