- Since the pandemic began, consumption growth has yet to recover to “normal” trends.
- There is significant “spending potential” to be unleashed when confidence returns.
- The hospitality & leisure categories continue to be key beneficiaries of a return to normal.
This weeks blog is a continuation from last weeks theme of a return to social gathering and normal consumption spending as we head into 2021. Mean reversions are one of the best opportunities in the investment business. Timing these mean reversions can sometimes be tricky but when something is trading far away from its “normal” level, unless something has changed forever, normal is where the trend typically reverts. Why am I so focused on this topic currently? Because in a world where most stocks are at all-time highs while being expensive relative to themselves and history, the value part of my brain gets more active. I’m not focused on traditional value metrics versus trying to find companies that have significant snap-back potential from depressed current conditions. Backward-looking returns may make for great marketing materials but in the investment business, it’s all about “what have you done for me lately.” As portfolio managers, we are always tasked with finding the next important trend. Nothing is more predictable than a consumers propensity to spend so when we see consumption growth below normal (below image) while observing a potential catalyst for mean reversion to happen (vaccine, stimulus, confidence), we want to be laser focused on the opportunities the thesis brings. Focus on the blue line below. Let’s talk about the rubber band concept, pull it down (brown line) and when you let it go, it tends to snap back an equal but opposite amount (blue line).
Spending Potential Set to Increase
What type of spending have you been slow to adopt? What spending do you want to do but are not allowed to do because of the lock-downs? What spending are you super excited to begin once you feel confident about your safety? When I look at the spending categories, one in particular stands out offering the best potential for a snap-back: leisure & hospitality. When COVID-19 started, everything slowed down or stopped but the leisure and hospitality industries have clearly been a category that has struggled the most and has taken the longest amount of time to recover. That’s where the real opportunity exists in my opinion. When global consumers are held back from doing an activity they enjoy almost more than anything else (recreating and socializing), my goodness what a wicked return to normal it will be once we all believe the coast is clear. Here’s the rub, there’s a large hole (virus cases rising and vaccine not fully distributed yet) between now and when the leisure theme has its wicked snap-back. So investing in this theme might have to be accomplished in stages and slowly unless one wants to subject themselves to a significant amount of short-term volatility. Regardless of the timing, the outcome seems quite certain: the mother of all recreation and social gathering mean reversions is coming in 2021.
Deep Dive Into the Theme: First Derivative & Second Derivative Beneficiaries
- Payments – no matter what we all plan to do in 2021, we have to pay for it which creates a great opportunity to buy a few laggards this year that have historically been significant leaders. Credit card companies of all kinds have lagged because transaction volumes, particularly cross-border ones have lagged as global travel has slowed dramatically. We expect Visa & Mastercard in particular to stage significant rebounds next year and beyond. American Express should also have a recovery but they are tied much more closely to business travel which could be slower to snap-back.
- Cruising – we talked about this category last week but I want to expand on the theme a bit. Long-term, this business could be challenged because all of the carriers have been forced to add a significant amount of debt to their balance sheets. Short-term, however, the industry should experience a big snap-back in demand for the next few years, and I think they will have strong pricing power.
- Lodging – we talked about hotels & resorts last week and we can add the gaming companies to this thesis. They have all been forced to add significant debt to the balance sheet which could act like an anchor to their growth long-term but we aren’t focused on the long-term with this theme. This is a tactical call to a return to normal which requires a fierce snap-back in demand as consumers take that vacation or weekend trip to Vegas they have wanted for a year+.
- Air travel – similar thesis with this industry. Generally, running an airline is a dreadful business with high fixed costs and these airlines now have more debt on the books but make no mistake, there’s a viscious return to flying coming for the next year at a minimum.
- Ancillary spending tied to recreation & social gathering – think about all the things we tend to buy when we are going out to eat, to a concert, on vacation, on a date, etc. There are some second derivative spending categories that should also have decent years as we return towards normal: cosmetics (Estee Lauder, L’Oreal, Ulta Beauty), ride sharing to the airport (Uber & Lyft), clothing & accessories (TJX, Michael Kors, Coach, Nike, Lulu, Nordstrom, Target, Walmart, American Eagle Outfitters, Abercrombie & Fitch, Urban Outfitters, Victoria Secret, Uggs, Vans, etc). Then there’s fitness. Many people have quit the gym but will return with vigor. Planet Fitness should see a renaissance. Many will also stick with Peloton or the Mirror, owned by Lululemon. Bottom line: there are a significant number of brands that could see a significantly better year next year even if we are just playing for the return to normal. Some of these brands and businesses will recover and continue thriving and some will recover for a period and then suffer from a heavy debt burden long-term.
2021 will not be a linear economic recovery, nor will the stocks recover in a straight line but from my perch, a basket of these beneficiaries should add significant value to a portfolio for all or part of 2021. From there we have to assess the business trends and consumption habits and compare those to the current unemployment situation to assess what the buy-hold names are and which ones are more worthy of just a tactical trade.
- Consumption growth is abnormally depressed and likely to mean revert in 2021.
- The leisure & hospitality sector should have significant rebounds in activity.
- The ancillary industries and companies that thrive from this mean reversion should also thrive.
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