The sudden slump in the stockmarket, which wiped 32% and 29% off the FTSE All Share and S&P 500 indices respectively between 1 January and the late March low, has been routinely described as a “panic” if not “pure hysteria”. It certainly counts as a crash, reminiscent of October 1987, but a panic would be characterised by shares selling off indiscriminately and in unison. That may have been the case initially, but investors subsequently became very discriminating.
Some companies are expected to be unaffected by the pandemic or likely to benefit from it in the years ahead; for others, it could be a death knell. The winners – the stocks that were already rising when the market reached the low – give us valuable clues to the shape of the post-pandemic market and its long-term investment opportunities. There is also a surprising loser that investors should steer clear of.
A strong record in tackling viruses
Gilead Sciences (Nasdaq: GILD, up 13% between 1 January and late March): the $93bn US biopharmaceutical company focused on antiviral treatments rose to prominence with its therapies for HIV. There followed treatments for hepatitis, including Sovaldi, a cure for hepatitis C. In 2015 encouraging results were announced in pre-clinical trials for the Ebola treatment Remdesivir, but the outbreak faded before its effectiveness could be proven conclusively. Subsequently, Remdesivir has been shown to be promising in the treatment of coronaviruses such as Sars, Mers and Covid-19. Covid-19 will not be the last virus to threaten the world’s health and future threats could be much more serious. Gilead’s expertise could have incalculable value even if the Covid-19 threat fades.
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Ocado (LSE: OCDO, 5%): the pandemic has resulted in a major shift to shopping online. Ocado was founded in 2000 by three investment bankers from Goldman Sachs and is a leading online supermarket in the UK valued at £9.6bn. What’s more, its technology platform has been adopted by Morrisons, Casino (France), Kroger (US) and others, while from later this year Ocado supermarket, now 50% owned by Marks & Spencer (M&S), will offer M&S merchandise to its customers. Once the most heavily shorted stock in the UK market, Ocado doubled in 2018 and rose by another 50% in 2019.
Netflix (Nasdaq: NFLX, 3%). What do people stuck at home thanks to Covid-19 do? They watch telly. Netflix has 167 million subscribers worldwide for its streaming service, which offers a vast library of films and television programmes, many of them produced wholly by Netflix or jointly with other companies. With a market value of $146bn, a price/earnings multiple approaching 100, annual content expenditure of $17bn and $12bn of debt (much of it rated “junk”), Netflix is second only to Tesla as the company value investors hate most.
A boom for Zoom
Zoom Video Communications (Nasdaq: ZM, 92%): with more and more people working from home and unable to travel, demand for remote video communications is burgeoning. Zoom has become the world leader in under ten years. Offerings include not just business meetings, but also online education, exercise classes and private broadcasting. The basic service is user-friendly and free, but Zoom expects to earn revenues from more complex services. Until then, its market value of $35bn means a price/earnings multiple of over 1,000 – enough to make the value investors charge into Netflix. Yet Zoom offers companies huge benefits in terms of convenience and correspondingly large cost savings, which it ought to be able to monetise.
BH Macro and BH Global (LSE: BHMG and LSE: BHGG, 7% and 5% each): while other defensive listed funds, such as Personal Assets, RIT Capital Partners, Capital Gearing and Ruffer, have been successful in protecting their investors against market falls, Brevan Howard’s twin listed funds, both launched in 2007, have actually benefited. Brevan Howard was co-founded by Alan Howard in 2002 and, unlike many hedge fund managers, he has proved to be not just a survivor but also someone whose commitment has never wavered. The Brevan Howard strategy is to generate modest returns from low-risk investment strategies, mostly involving interest rates and foreign exchange, and then reinvest the returns in long-shot bets. The result? Low but very rarely negative (only 2015) returns in good times, but significant returns at times of market dislocation. After six dull years, which caused the stocks to trade at discounts to net asset value (NAV), 2020 is proving the third consecutive strong year. Their investment performances in sterling in the year to date have been 21.8% and 14.8% respectively; their discounts to NAV have widened to 15.7% and 11.4%.
Dignity (LSE: DTY): surely the outlook is bright for the UK’s largest funeral services company, operating from over 800 locations and 46 crematoria? Actually, no, not even on the wildest estimates of the death toll. Given that the pandemic primarily affects the elderly, higher deaths in the short term will mean fewer in the coming years. Dignity was set up to consolidate a fragmented industry, the assumption being that a national chain will do a better job more profitably than what Americans call “Mom and Pop” businesses. Yet the history of many failed consolidators in varied industries shows that Mom and Pop know their local markets and understand the required level of service far better than remote corporations. Dignity has learned this lesson the hard way in the last three years. The shares have fallen 44% this year.
What to buy now
Are these shares (except Dignity) still buys? Many think that what goes down the most will go back up the fastest. In truth, shares that do well on the market’s way down often do best on the rebound while the big losers have a short-term bounce but then fade.
Gilead is a first-class company, but antiviral treatments can always be outflanked by effective vaccines, the hunt for which is on. Remdesivir, if it really does work, may not be available in time for the current pandemic. Gilead is in pole position in an increasingly important area of medicine, but investors might prefer to spread their risk more widely. Healthcare as a sector should come out of the crisis in a strong position and there are many exciting new treatments in the pipeline, not just antivirals. Trusts such as Worldwide Healthcare (LSE: WWH), Biotechnology Growth (LSE: BIOG) and BB Healthcare (LSE: BBH) will invest in Gilead if they deem it attractive. They are in a better position to judge than an amateur investor.
The trend to online shopping will surely accelerate and Ocado is a clear leader. Other supermarkets have done well, but it is hard to see an increase in their long-term revenue growth. Meanwhile, retailers with a proven online model combined with home delivery, such as Next (LSE: NXT), can prosper. The enablers of online ordering and home delivery such as Just Eat (LSE: JET) should also see higher growth. The same applies to the streaming services, such as Netflix. A riskier alternative might be Disney (Nasdaq: DIS). The share price has suffered from the effect of the pandemic on its theme parks and on cinema attendances, but the success of its new subscription channel, Disney Plus, is assured.
However expensive Zoom looks, its business must be booming and the potential market is vast. Online education in particular is set for structural growth.
Growth investing will remain fashionable
More broadly, predictions that the technology and technology-enabled sectors, the cornerstones of any growth strategy, are heading for a crunch look hopelessly premature. Technology and the gig economy are proving critical to keeping daily life ticking over. This bodes well for the technology trusts, Polar (LSE: PCT) and Allianz (LSE: ATT) and for the tech-heavy growth trusts such as Scottish Mortgage (LSE: SMT), Monks (LSE: MNKS), Mid Wynd (LSE: MWY) and Baillie Gifford US (LSE: USA). Value investing will remain in the wilderness.
While the caution of the defensive trusts has been vindicated, they may not be buys now. In theory, they could move wholesale into equities at or near the market lows, but in practice they never do. When markets recover they are likely to be left behind once again. They will be good bets when markets are riding high and it is time to cut exposure to risk before the next crisis. But the Brevan Howard funds are an exception as all they require to perform is the opportunities offered by uncertainty and volatility, which will persist well into the recovery. An investment that goes to sleep in the good times but is a reliable winner in the bad adds value to any portfolio.
We have seen many crises over the decades, each one different. Markets collapse, then recover and, as time passes, past crises become barely a blip on a long-term chart. But the internal dynamics of markets change and those who stick with the winners of the past are left behind, as value investors have found out to their cost. The winners of the future always look expensive at the time, but may seem to have been bargains in five years’ time.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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