A different type of barbell
MICHAEL KOSKUBA 15-Sep-2020
If the pandemic has been offering any thematic takeaways, it might be that the so-called “stay-in” or “stay-at-home” stocks have shown resiliency and superior financial results versus the “go-out” themed companies. Yet for longer-term investors, it might be wise not to eschew all “go out” stocks. In fact, a barbell-approach to large-cap growth stock investing—one that includes both “stay-in” and “go-out” companies, may position investors well for a post-pandemic environment and beyond.
It’s easy to see how some large, secular growth companies have benefitted from accelerating trends brought on by the pandemic. For example, companies offering video conferencing, e-commerce platforms, and cloud computing solutions have fared better than most in this unprecedented environment, certainly compared to travel and leisure companies, brick and mortar retailers, casual dining, and oil drilling companies. These “go-out” stocks are more dependent on a physical presence and/or a cyclical upturn.
Thus, as states continue to reopen (and hopefully stay open), some “go-out” stocks appear poised to outperform. Favorable headlines regarding COVID-19 treatments or vaccines, as well as the potential for additional fiscal stimulus, suggest that a rotation into certain “go-out” may be underway and continue.
The battle between these two groups will likely be contingent on economic growth data, bond yields, inflation trends, currency valuations, COVID-19 headlines, and other factors. And in the end, the trajectory of the pandemic will determine when full economic activity can resume. Although significant risks remain, we remain optimistic that the country (and global economy) will recover and return to better times. Thus, it is important to position the portfolio for the current environment but not at the expense for what comes after.
In general, the same rules apply in evaluating both “stay-in” and “go-out” categories. Market leaders with experienced management teams, financial strength and poised for sustainable revenue and earnings growth are preferred. The mega-cap tech companies have been the obvious leaders through this pandemic, but in any return to normalcy, companies associated with off-price retailing, ridesharing, elective surgeries, and cross-border transactions may represent a few of the more compelling “go-out” businesses.
We live in a dynamic world where economic data, corporate news, and geopolitical shocks can happen overnight. In addition, exogenous factors—including the November elections, global trade policy, future Fed decisions, Congressional action, the yield curve, the value of the U.S. dollar, inflation/deflation trends, and the scale of any regulatory action on large technology/e-commerce companies—can shift sentiment overnight and even alter the earnings prospects of individual companies. This is where an active approach should excel.
Ultimately, we believe that allocating between “stay-in” versus “go-out” stocks is not an either-or proposition. It is important to own companies that have benefited during the pandemic, while also consider those that will re-emerge once we cross the chasm back to more normal times.