The winners of lockdown and the firms fit for a post-Covid world

The coronavirus lockdown has produced a number of stock market outperformers, and so too will the new world we inhabit as the return to work gathers pace.

The coronavirus pandemic has profoundly changed the way millions of people go about their daily lives, and certain behavioural trends seem to be here to stay as we move towards some kind of ‘new normal’ with the easing of lockdown restrictions.

While firms across many industries were forced to turn the lights off as part of the collective effort to halt the spread of the Covid-19 virus, some businesses have thrived under the ‘stay at home’ and current ‘stay alert’ government advice.

The standout winners, following the systemic changes that have seen millions of people work from home, have been technology businesses, cloud computing leaders Microsoft and Amazon being two heavyweights.

Another US name that has only recently gained prominence is video conferencing platform Zoom Video Communications, which is not to be confused with Zoom Technologies. The latter, which has no affiliation to the now-famous video conferencing firm, saw its share price rise by 240% ahead of it being suspended as investors zoomed in on the wrong Zoom.

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Meanwhile, in the UK market, Gervais Williams, manager of Diverse Income investment trust, notes that two firms whose share prices have been boosted by the working-from-home trend under lockdown are LoopUp, a remote meetings business that offers video conference calls, and Kape Technologies, a provider of cyber security software.

Businesses with defensive characteristics – a trait the technology giants are themselves considered to possess  these days – have also fared well ahead of a recessionary environment taking hold. Simon Edelsten, co-manager of Mid Wynd International investment trust, picks out Swiss pharmaceutical giant Roche and Equinix, a US leader in data centres, as two ‘recession proof’ businesses that have performed well over the past couple of months.

Summarising the trend, Ollie Beckett, fund manager of the TR European Growth Trust, says: “The market in recent months has rewarded either defensive business models or perceived winners from the lockdown/stay at home. So while the market seems to have rallied quite strongly, it has been a very narrow range of companies that are up strongly.”

Lockdown beneficiaries outside of work hours include two other US tech giants, Facebook and Netflix. In the UK, online grocer Ocado has been a big winner. Williams says other UK businesses benefiting from more leisure time being spent at home include Zoo Digital, a world leader in television voice dubbing and subtitles, and AO World, an online electrical goods retailer. He describes the latter as “the Amazon of white goods”, which has thrived as rival retailers have been forced to close their stores.

The consensus regarding the lockdown winners is that while some strong share price gains have been made, this trend has plenty of mileage in it yet, suggesting that these firms should continue to grow their market shares when other businesses are given the green light to reopen.

Rachel Winter, associate investment director at Killik & Co, says: “For many of us, returning to work may well involve staying at home. Lockdown has forced thousands of firms to allow their employees to work flexibly for the first time, and many of these companies have been surprised by how successful this has been.

Home advantage

“Advances in video conferencing and collaborative-working software in recent years have enabled many desk jobs to be done just as well from home as from an office. Although many employees have missed the camaraderie of office life, others have relished the chance to skip the commute and enjoy more leisure time. It seems that working more flexibly will be a firm feature of our future, and this should be good news for cloud computing businesses such as Microsoft and Amazon.”

To play this trend, James Thomson, manager of the Rathbone Global Opportunities fund, recently bought TeamViewer, a German technology business that provides remote working solutions. He explains that for the technology firms that have fared well during lockdown, “coronavirus is accelerating existing trends” that will continue to play out as lockdown restrictions ease. He says: “For Ocado, there has been an increased shift towards online grocery, while for Netflix, there has been greater demand for online viewing. Amazon is benefiting from a rise in e-commerce.”

Williams agrees that the tech-savvy firms that have gained market share during lockdown look well-placed to continue to prosper. However, he has also been eyeing up sectors and companies that could return to form when restrictions are relaxed. He says: “The most obvious sector to look at is travel, which will have an uptick in demand.” With this in mind, he recently bought easyJet, which he describes as “being in financial turmoil, but set to be a winner” in the troubled sector, due to “the strength of its network and operational efficiency”. He also picks out Dart Group, the Jet2 operator, as another favoured play. “The firm is small and nimble enough to take market share,” he says.

Plenty of potential

Beckett is also tapping into the return of personal travel. He says: “Online travel agents with a flexible cost base – such as eDreams, listed in Spain – will be beneficiaries of markets opening up again.

But we think business travel will take far longer to return to previous levels, if it ever does.” Elsewhere, Beckett does not expect the move to counter climate change to be halted by the pandemic. He anticipates further subsidies for electric and hybrid cars, and that “some automotive suppliers, such as Norma and Stabilus, may see a recovery in their share prices.”

Other fund managers have been drawn to out-of-form shares, Richard Buxton, head of UK equities at Merian Global Investors, being one. He has been adding to cyclical businesses in the expectation that the stock market will not be as “one-directional in favour of growth over value as the last few years have delivered.” He has added housebuilder Taylor Wimpey to his Merian UK Alpha fund, topped up his positions in banks Barclays and Lloyds, and added to his holdings in power group Drax, engineering firm Weir and brewer Whitbread. Buxton’s view is that some sectors will benefit from a V-shaped economic recovery, while others face a slower U-shaped scenario.

Buxton acknowledges that a zero-interest rate world with subdued growth and little inflation is clearly going to be supportive for growth stocks with defensive characteristics, continuing the trend of recent years. That said, he adds: “The scale of price falls in more cyclical areas and the degree to which value shares move from pricing-in distressed capital-raising to a cyclical rebound means you could have a period in which market leadership rotates quite violently between growth and value.”

But the biggest return-to-work winners may well emerge in the pharmaceutical space, among various companies working on treatments and tests. At the end of May, the time of writing, AstraZeneca says it has the capacity to manufacture one billion doses of the University of Oxford’s potential Covid-19 vaccine. Other firms are hard at work developing a cure for Covid-19 infection.

Williams backs Avacta, which is developing a 10-minute home saliva test for Covid-19. If approved by regulators, the test could be a “game-changer for social distancing and lockdown”, Williams says. “The share price has gone up significantly already,” he adds, “but this company could be a world leader if over 100 million of these tests are used each month.”

US lockdown trends find lots of UK friends

The big risk with investing in a particular theme or trend is being too late to the party and as a consequence paying high valuations that may ultimately prove excessive. But investors have been early to spot the lockdown winners, according to data from interactive investor, Money Observer’s parent company. Exposure is being played through US-listed shares, with seven of the top 10 most-bought shares in April being technology businesses.

Examples of shares reflecting ‘lockdown lives’ include Zoom Video Communications, Disney, which launched its Disney+ service in the UK in March, plus Amazon and Netflix. Also among the top 10 was biopharmaceutical firm Gilead Sciences, in sixth position, as investors seek to profit from the race to find a Covid-19 vaccine. In late May, it was announced that Gilead Sciences’ experimental coronavirus drug will be made available to selected patients in the UK.

The trend is also evident among customers of Saxo Bank, which runs an online trading platform. In the first three months of 2020, Tesla, Apple, Microsoft, Amazon and Facebook were among the top 10 most-traded stocks across all markets.

Top 10 most-bought US stocks in April

1 Tesla
2 Microsoft
3 Amazon
4 Apple
5 Zoom Video Communications
6 Gilead Sciences
7 Walt Disney
8 Facebook
9 Boeing
10 Netflix

Source: interactive investor