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Finding investment opportunities

Wading through COVID winners and losers

Investing newsroom
Chris Waters  , Senior Investment Analyst — International Shares

Chris Waters
Senior Investment Analyst — International Shares | Email Chris »

21 April, 2021

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Financial headlines and market pundits have focused on COVID winners and losers, and recovery plays. But we believe that to find the best investment opportunities, you need to look beyond simplified narratives.

The pandemic has created vivid investment stories of winners and losers. Zoom is a COVID winner, as it became an essential tool for working from home and keeping in touch with family and friends during lockdown. Meanwhile, airlines were COVID losers who had to watch their own share prices tumble as global travel ground to a halt.

The markets have embraced easy-to-follow narratives

First, there’s the winners-and-losers narrative. COVID winners’ shares reached multiples of pre-COVID levels, while COVID losers — like airlines — hit historic lows.

Then there’s the recovery play. Since the vaccine announcement last November, some COVID losers — airlines, oil and gas, manufacturing — have morphed into recovery plays as the global economy reopens.  

High-growth and tech stocks have also made headlines, often supported by retail investor demand. ARK Invest has seen great success with its exchange-traded funds that invest in disruptive fast-growing industries like green energy, robotics, and DNA sequencing. Tesla is up almost eight-fold from COVID lows. Blink Charging makes charging stations for electric-vehicles, and its twenty-fold increase makes Tesla’s rise look pedestrian. 

Vaccine announcement

Active management means looking beyond the headlines

While we’re sceptical of headlines and popular narratives, we do see opportunities in the market. Opportunities that include companies outside the news, and stars of the pre-COVID era. In these nearly post-COVID times, we think active management and stock selection matter more than ever.

Amazon is an example of a pre-COVID star that seems neglected, if not forgotten. Amazon was a COVID winner last year, as the pandemic rapidly accelerated a shift to ecommerce and cloud computing. But the share price faltered over the last six months. Facebook and Google have also seen their stock prices treading water over this period, despite continued strength in these businesses.

Names like Boston Scientific — newly added to our portfolio — may be completely off the market’s radar. Boston Scientific manufactures innovative medical devices used to treat a range of medical conditions in over 30 million patients each year. While not a household name, Boston Scientific has a great track record of performance, and a strong growth runway. With the market’s focus elsewhere, we saw an opportunity to buy this quality company at an attractive price.

Zoom shareprice

Recovery plays — often last year’s COVID losers — may be over-optimistic.

As vaccines roll out globally, we can see a path to normality. US domestic travel bookings are nearing pre-pandemic levels and the US PMI index, which measures expected manufacturing demand, is at heights not seen in years.

Recovery plays have had a strong performance in recent months, outperforming both COVID winners and the wider market.

But some recovery plays look a trifle over optimistic. For example, travel booking website Expedia is over 40% above its pre-COVID share price, but a full recovery in global travel is some way off.

Not all recovery plays are overvalued, but you need to be increasingly selective.

 

COVID winners may not keep their place on the podium

Our concern with COVID winners is that demand may slow in post-COVID times.

For example, Zoom’s share price rose to three times its pre-COVID level as the pandemic drove a surge in demand for video conferencing. But as people return to the office, and competitors like Microsoft’s Teams gain market share, Zoom may not be able to sustain its growth — or premium valuation.

 

High-growth and technology shares look a little too hot

This basket of these high-growth stocks is still double its pre-COVID levels — despite a 24% decline from recent highs. Many of these companies are still in their development stage and profitability is years away. While some will grow into their premium valuations, many will likely fall short of the lofty expectations in their current prices. We think the odds are against you finding a successful investment in these stocks at current prices.

 



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