Early in the Covid-19 crisis our focus on companies with accelerating and sustainable earnings growth prompted investments in companies that were beneficiaries of stay-at-home measures. Examples included online education, video-gaming and data-centre companies.
We are now observing the recovery in markets that have been hit by the virus. Signs of improvement or stabilisation are being buttressed by substantial fiscal stimulus measures. As a result, our investment strategy is now also highlighting companies that may have suffered during the crisis but look likely to be beneficiaries as economies begin to reopen.
Basic-Fit, a gym operator in solid shape
Take Basic-Fit (Amsterdam: BFIT) a low-cost gym operator in Benelux, France and Spain. It operates in markets that are underpenetrated and not very competitive. While the company’s revenues were severely affected in the short-term due to lockdowns and stay-at-home measures, we believe it may benefit as economies start to reopen.
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Encouragingly, the company experienced low cancellation rates during the first months of the pandemic, which bodes well for its medium to long-term profitability.
Basic-Fit is also well positioned owing to its investments in technology. Its software should allow it to manage the entry and booking processes at its gyms effectively and facilitate social-distancing measures. Gym memberships are also now rising. Furthermore, Basic-Fit recently raised extra funding, which we believe will be supportive of future revenue growth and market-share gains at the expense of the company’s weaker competitors.
Chinese luxury cars are ready to motor
Another eye-catching stock is China Yongda Automobile Services (Hong Kong: 3669), a nationwide car dealer specialising in luxury vehicles. Yongda has a leading position in the sale of BMWs and Porsches, brands with strong growth prospects and pricing power.
Last year, sales of new cars in China dropped sharply and the sector was hit hard in the first quarter by Covid-19. However, premium-car sales rebounded in April. Showroom traffic at car dealerships also recovered. We believe Yongda is well-positioned to deliver top-line growth and margin improvement as car sales continue to strengthen. It is also a beneficiary of rising car ownership and the growing popularity of luxury goods in China. Covid-19 may also raise car-ownership rates as consumers avoid public transport.
Crocs crunches costs
Crocs (Nasdaq: CROX), a global leader in casual footwear, is another potential recovery beneficiary. The company spent years trying to make its operations more efficient and reduce costs. Before the crisis the business was performing well, with sales rising. However, the pandemic led to supply disruptions and store closures. The shares declined by over 70%.
We viewed the share-price decline as an opportunity to own a well-run business with a strong brand. Crocs has seen a recovery in sales in China and Korea, while crocs.com and other digital-commerce channels have remained open. Consumers’ migration to online shopping also bodes well. We believe store reopenings and a lower cost base will create sustainable and accelerating earnings growth.
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