4Q 2020 US Equity Outlook: Navigating Macro Uncertainty With Bottom-up Stock Selection
Portfolio Manager Ramiz Chelat explores companies benefiting from the shift to work-from-home and e-commerce.
As Covid cases increase, governments will concentrate on localized lockdowns. This will result in less economic damage, but will extend the timing of a recovery. Investors also want to see how consumption holds up as stimulus measures roll off in the US and Europe. While investors are focused on the development of a vaccine, concerns remain around efficacy and availability.
In the technology sector, e-commerce, online gaming and cloud computing companies have benefited from the impact of Covid and have seen earnings upgrades. However, multiples have expanded somewhat ahead of earnings while the extent of the online trend’s reversal post-Covid is unknown.
Investors should look for companies with proven and repeatable models and established market-leading positions. It is also important to focus on high returns on invested capital from their core business, while investing in new areas that can generate incremental value over the mid to long-term. For example, e-commerce is a strong structural theme in China, where penetration is roughly 25%. Alibaba is a leading player with 60% market share, despite competition. It has a clear advantage due to its number of merchants and product selection, and its return on invested capital overall is 20% despite new investments.
In our view, investors have not fully appreciated the long-term benefits that some leading retailers will see from the shift to e-commerce. Some dominant retailers have invested in omni-channel, which integrates their physical stores into their e-commerce businesses. This has resulted in potentially higher gross margins and lower operating costs from e-commerce as orders can be filled from stores. For example, Nike recently indicated gross margins on e-commerce at 10% higher than wholesale.
IT services and BPO (business process outsourcing) companies are adjusting their cost bases due to employees working from home. For example, Teleperformance, which provides outsourced call centers for corporates, successfully shifted roughly 80% of its employees to work from home and now has a long-term goal for 40-50% of staff to work from home. We feel that this has clear implications on leasing space and capex.