As we head toward the weekend I wanted to drop a quick note.
COVID-19 likely sounds the death knell for many companies, like slow-to-adjust retailers. But it also represents a likely accelerant for others, including those exposed to trends such as work from home (WFH), cloud, e-commerce, internet, digital transformation, streaming, etc.
Under no likely scenario does this virus totally disappear in the near future, meaning corporate executives, citizens, government leaders and the like can’t simply assume it will soon be business as usual without protecting their businesses against future outbreaks (of COVID-19, or other viruses). That would be grossly negligent.
Rather, they will be taking steps to make sure they can deal with this again because that helps right now, and in the future. That gives the advantage to the trends mentioned above, which were already strong leading into the pandemic.
Not all stocks with exposure to the aforementioned trends will be winners, however. Some will see much longer sales cycles, lower average selling prices, deferred deal closings, and more. Cloud-based payroll providers, for example, could be disproportionally hurt, which is why many of these stocks are still 35% to 45% below their all-time highs.
Others might not grow AS fast, but should still do very well, provided we don’t have a worst-case scenario (rolling, severe breakouts worldwide; social unrest/rioting; major supply chain disruptions; no vaccine/effective therapies on the horizon, etc.).
These companies include names we cover, such as BlackLine (BL), which is used by larger companies to automate financial/accounting processes; Descartes (DSGX), which helps with supply chain routing; Smartsheet (SMAR), which is an inexpensive productivity tool; and Survey Monkey (SVMK), which is self-explanatory and will fall off in some areas of use but also pick up as organizations seek more information from their communities to help inform their evolving strategies.
Then there are the companies that could do even better in either a best-case or base-case scenario. These include CrowdStrike (CRWD), a likely winner in security; Datadog (DDOG) and Dynatrace (DT), two ways to play application and cloud infrastructure monitoring; Chewy (CHWY), for online pet supply ordering; and Livongo (LVGO), for digital health monitoring, especially diabetes, which puts people at higher risk for COVID-19.
As a side note, there will be some investment winners that don’t fall perfectly into any of the above themes. That’s why we’re still covering Freshpet (FRPT), Sunnova (NOVA), 10X Genomics (TXG), etc. But don’t discount those trends just because they’re seemingly so obvious right now.
That all said, just because a growth trend exists doesn’t mean investors should buy into it at any price!
Even though stocks have been recovering nicely, we still want to be mindful that there’s a lot of uncertainty in terms of how this all plays out, and unanswered questions about what happens if and when the stimulus gravy train goes off the tracks.
In a deep recession/depression scenario, even the growth winners would likely be investment losers if purchased around current prices. It’s not like all these stocks are cheap right now relative to historical valuations during recessions.
In short, we’re walking a bit of a tightrope here. On the other side of the Valley of Death are very attractive capital gains for investors that diversify their investments in the right trends, average in, and keep putting one foot in front of the other.
If either the best-case or base-case scenarios play out (i.e. economic growth resumes later this year or early in 2021), we should get to the other side in good shape.
But if the worst-case scenario plays out, or starts to play out and freaks everyone out again, the rope could easily snap, and down we will all go. Companies with more exposure to growth, resilient business models, strong balance sheets, etc., will go down less, but they’ll still go down. I think this scenario is unlikely, but I wouldn’t be doing my job if I didn’t acknowledge it could happen.
There are no specific actions I’m recommending today. More, I just wanted to pass these thoughts on as food for thought as we (hopefully) begin to see consistent decreases in new cases and think longer term about what investment trends we want to be putting our hard-earned money in.