Joel Litman The At-Home Revolution is brand new presentation by Altimetry’s Hidden Alpha editor Joel Litman where he reveals that the pandemic’s success stories struggled. These stocks have soared as people holed up inside their homes this year. With a possible end to the crisis now in sight, investors are now wondering if time is running out for these firms and their outsized profits and growth. I think folks may be getting ahead of themselves. Here’s why…
By Joel Litman, editor, Altimetry’s Hidden Alpha
Last Monday was a big day for the stock market… And it wasn’t due to the major news networks calling the presidential race.
Early in the morning, Big Pharma firm Pfizer (PFE) announced it had received positive results from its coronavirus vaccine trial. Its candidate was more than 90% effective – well above what the U.S. Food and Drug Administration (“FDA”) was seeking and what investors were expecting.
A frenzy of investor excitement erupted… The broad market opened significantly higher, approaching a 5% gain early in the day.
And yet, not all stocks saw the same kinds of gains…
The stocks hit hardest by the pandemic were up the most. Stocks of companies like hotel giant Hilton Worldwide (HLT) and airliner American Airlines (AAL) ended the day up more than 10%… Shares of cruise ship operator Royal Caribbean Cruises (RCL) were up more than 25%… And AMC Entertainment (AMC) went up more than 50%.
However, many of the pandemic’s success stories struggled. Video-conferencing tool Zoom Video Communications (ZM), exercise-equipment company Peloton (PTON), and streaming giant Netflix (NFLX) were all down big on the day.
These stocks have soared as people holed up inside their homes this year. With a possible end to the crisis now in sight, investors are now wondering if time is running out for these firms and their outsized profits and growth.
I think folks may be getting ahead of themselves. Here’s why…
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The first reason why is a classic issue that investors have with this type of news. It’s what we call the “history book” issue.
For example, the Great Depression may only take up one chapter in a history book. Even if you had an entire book about the crisis, it might take you less than a week, or even a day, to read it. The time it takes you to get from 1929 to 1933 might be a few hours or chapters at the most.
However, the Great Depression lasted for roughly a decade, depending on the country. Living through it was a much different experience when you didn’t know what was coming next.
The same goes for the medieval Hundred Years’ War. It may not even fill up an entire chapter of a European history book. But the war lasted for more than century (116 years, not 100), with many twists and turns along the way.
Reading a textbook may give the illusion of a clear understanding of these events… But it’s much different than living through them. When we think of current events in the context of history, we extrapolate that news will lead to follow-up events quickly.
The reality is that things can take a lot longer to reach their “logical” conclusion… And it’s often a bumpy ride.
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We don’t know everything about the coronavirus vaccine yet…
We know the Pfizer trial had a high efficacy level. However, we don’t know when the vaccine will be available or if the data could change in coming weeks or months. There will be a lot more time between this news and real developments than people might guess.
Additionally, coronavirus isn’t going away anytime soon. Cases continue to rise in the U.S. and across the globe. This vaccine or one of the other candidates might not be available for most of the U.S. (let alone world) population until mid- or late 2021, or even later. There’s also a question of whether people will take a vaccine and how long immunity will last.
When considering all these questions and overhangs, the market has likely been too excited. Many of the trends the pandemic has unlocked are here to stay.
Companies in industries that have been punished are likely to continue to suffer for some time. This means it’s not time to have a “dash to trash” and buy beaten-down companies with high credit risk in the hope they will survive.
Instead, investors should still be selective. Companies will still need to make it through the coming months. Businesses in travel and other industries have been laid low and might still go under.
Similarly, the “At-Home Revolution” is far from over…
While working at home may not always be as widespread as it is currently, it’s not going away. As a great example of this, we here at Altimetry will shift to a “hybrid” model…
Even after everyone can return to work, we’re mandating that people work from home at least part of the time. It will save us costs on office space and help people be more productive when they just need to put their heads down and work.
Similarly, investments people have made in their homes and in experiences – like new boats, better golf equipment, and home additions – are likely to lead to structural changes in how people spend their time.
People can become anchored on how much they’ve already spent on something. That leads them to spend more on it – even if it might make sense to spend money elsewhere.
The At-Home Revolution and changes in consumer spending are likely to last. This means the winners of this trend will enjoy strong cash flows for longer than people and the market may fully expect.
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Editor’s note: The At-Home Revolution has caused an incredibly powerful tailwind for certain stocks. Zoom is up 487% in 2020… Peloton is up 258%… and DocuSign is up 181%. Joel just put together a presentation laying out everything you need to know – including the name and ticker of his favorite At-Home stock. Watch it here.
