June 8, 2020
What’s next for your portfolio? Investment Implications of the COVID-19 Pandemic
COVID-19 has changed the world in ways that were unimaginable just a few short months ago. At the time of writing, more than 6.5 million people worldwide have contracted the disease and nearly 400,000 deaths have been reported. The health and human toll has been stark, and the economic toll is just beginning. The virus has forced us to re-think how we go about our daily lives. Previously mundane tasks, like going to the grocery store, grabbing a bite to eat, or taking public transportation, are now considered risky activities, while favorite pastimes like professional sports or leisure travel have all but been eliminated. As we all continue to adjust to this “new normal” of social distancing, it is clear to us that several investible trends have emerged from this pandemic. Some trends were already in place and have just been pulled forward several years, while others are more nascent, yet no less enduring in our eyes. While we hypothesized about many of these trends earlier, the recently completed corporate earnings season and accompanying management commentary affirmed our view.
The following are five key trends that we believe will outlive the pandemic era:
- Continued growth of e-commerce and omni-channel retail: It’s hard to believe that Amazon is now over 20 years old and ubiquitous in our lives, and yet e-commerce penetration in the U.S. was only 16% of total retail spend in 2019. While e-commerce has been growing its market share for many years, this pandemic has turbo-charged that trend. With many physical stores closed, or open at limited capacity, consumers have been forced to embrace e-commerce for much of their needs. Previous categories with limited penetration, like grocery deliveries, have exploded in popularity, while once-struggling food-delivery services have been given a lifeline. Among companies with a large physical store presence, some have adapted well and are thriving with their Omni-channel approach, while those that have been slow to embrace changing consumer behavior are struggling to survive. To get a sense of the dichotomy – Neiman Marcus, JCPenny, and J. Crew all recently filed for bankruptcy, while Best Buy reported digital sales growth of 155%, Walmart’s online sales grew 74%, Target’s grew 141%, Lowes’ grew 80%, and Home Depot’s grew 79%. Clearly, the retail industry is undergoing disruptive change. E-commerce or Omni-channel category leaders appear to have a distinct advantage and likely will keep grabbing market share.
- Acceleration of digital payments and digital wallet adoption. The rise of e-commerce and peer-to-peer software solutions has facilitated digital payment adoption, and the COVID-19 pandemic has made them an essential service. With cash transactions now more disadvantaged due to virus-spreading concerns, this trend is expected to sharply accelerate. While credit cards remain the leading source of payment, the fastest growing segments of the payments ecosystem include peer-to-peer payments and digital wallets. Companies that are leaders in these categories, like Square and PayPal, are well-positioned for outsized growth. Square’s management reported on its Q1 2020 quarterly conference call that Cash App customers with direct deposit grew from 3 million to 14 million over a four week period in April. Customer cash balances during that time grew to $1.3 billion, roughly double where they began the year. PayPal’s CEO cited similar trends on its Q1 earnings call. CEO Dan Schulman said April was the company’s strongest month since its IPO. For the month, the company added 7.4 million new active accounts, and experienced record engagement and transaction volumes. The company anticipates adding 15 million to 20 million new active accounts this quarter. These companies are at the heart of the evolving payments landscape, and their solutions, widely deemed to be simple, elegant and trustworthy, are gaining increased adoption by businesses and individuals alike.
- Rising acceptance of remote work. Many CEOs have been pleasantly surprised by how efficiently their companies are operating with employees working from home. Old beliefs and norms are being challenged, and many are now embracing the idea of remote work for at least some of their employees once the coronavirus crisis passes. Over the last few months, leading companies like Facebook, JP Morgan, Twitter, and Nationwide Insurance (to name a few) have all indicated that a significant portion of their workforce may have the option of working remotely once the pandemic passes. Technology companies that facilitate and support this workplace change stand to benefit the most. Cloud services, online communication and collaboration tools, the SaaS ecosystem, and cloud-native cyber security solutions should see accelerated adoption rates. Some of the most often-cited beneficiaries include Zoom, Microsoft and Slack, but the list of technology winners is far more extensive. Perhaps less obvious, homebuilders and home-improvement retailers may also benefit. With remote work a possibility, many employees can choose not to live in crowded cities where space comes at a premium. This will likely drive increased demand for single-family homes in suburbs and smaller cities. And with employees expecting to spend more time at home, their willingness to invest in their homes and home offices should be robust.
- Renewed focus on hygiene. This crisis has put a renewed focus on personal hygiene and the cleanliness of oft-trafficked public spaces. Sales of companies that focus in these areas will likely continue to be elevated for as long as the virus is a threat. We also believe that most of these companies will experience a permanent increase in demand, as many of the personal habits that are formed during this time will endure, and policies and procedures that are put in place as the economy reopens will outlast the pandemic. In our personal lives, we will likely be habitually washing our hands more frequently and wiping down surfaces regularly. Cleaning protocols put in place for airplanes, public bathrooms, office buildings, hospitals, schools, public transportation, and manufacturing facilities will likely remain in place long after the virus threat recedes. All of this points to heightened demand and expanded business opportunities for companies with solutions that address these behavioral and procedural changes.
- Less reliance on global supply chains and just-in-time inventory. This pandemic has shone a light on the risks inherent in global supply chains and just-in-time inventory management. While both have proven to be highly efficient and great at reducing costs, both failed the needs of the country in a time of crisis. As the virus spread and hospitalizations soared, the U.S. found itself woefully short of critical medical supplies, protective equipment, ventilators, and pharmaceuticals. With global trade shut down due to the virus and very little inventory on reserve, the country was forced to recreate domestic supply chains and production facilities on short notice. While our efforts have had varying degrees of success, there is no doubt that it was a major setback in our fight against the virus. Coming out of this crisis, we expect the government to incentivize supply chain resilience over efficiency. We further expect to see widespread re-shoring of medical equipment, pharmaceuticals, and essential technology. We will likely see greater use of tariffs and export restrictions to accomplish these goals, along with incentives for constructing manufacturing facilities in the U.S. One recent example was the high-profile announcement by leading semiconductor manufacturer, Taiwan Semi, that they will build a state-of-the-art facility in Arizona. While the implications of this trend are multi-dimensional and less clear, we will be paying close attention to opportunities that may arise as de-globalization progresses.
In closing, the world looks very different today than just a few short months ago. The health and ensuing economic crisis is forcing society to adapt to new ways of thinking and doing things. In some areas, new habits are being formed, while in others, emerging trends are being reinforced, especially when it comes to the transformation of the enterprise. As Microsoft CEO, Satya Nadella, said on the company’s Q1 earnings call, “We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security.” Even though the economy is just now beginning to re-open and many companies have been permanently impaired by the pandemic, there are many companies that are thriving or stand to benefit from the changes taking place. It is our goal to continue to identify, and to provide our clients with exposure to, the companies that are well-positioned for this evolving landscape.
 Digital Commerce 360 analysis of U.S. Department of Commerce data.
 ‘Omni-channel retailing is a fully-integrated approach to commerce, providing shoppers a unique experience across all channels or touchpoints.’ Shopify.com
 Sales growth data reported in each company’s respective Q1 2020 earnings report.
 Cash App is a mobile payment service developed by Square.
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