Brands Expert Calls It: The Social Gathering Recession

Key Points

• Recessions and slowdowns are part of the business cycle – each is unique and different.
• Today’s recession is unlike any other – at the epicenter is “social gathering”.
• The mean reversion back to all things “social” will be fierce.

Traditional Recessions

When one plots the full business cycle on a chart it looks a lot like a mountain range or a roller coaster. There are peaks and valleys and period of “goldilocks” in between. Unfortunately, as investors we have to take the boom and bust cycles together. With proper risk management strategies, an investor can certainly try and smooth out the peaks and troughs of the cycle but largely we ride through the storm while trying to dial up or down our risk exposure throughout the full cycle.

Today’s “recession” is not a typical one. The classic definition of a recession is two consecutive quarters of negative GDP. Because of fiscal and monetary stimulus from the Federal Reserve & our politicians, we have not had a technical recession but there is absolutely a recession in certain consumer habits that are engrained in our DNA. Because of COVID-19 and the policies put in place to try and keep the virus from spreading, social gathering largely across the board has been squashed or limited. The companies and industries that once thrived are struggling and have layed off tens of thousands of employees. Many of these companies have been forced to raise debt to allow them to bridge the gap between here and when a vaccine is broadly distributed and a return to social gathering normalizes. Typically, “epi-center” industries and the stocks in them suffer the most and recover the quickest once the worst is behind us. There has probably never been more pent-up demand for being social, travelling and having experiences.

The Social Gathering Recession

Socializing is in our DNA. As a species we are not wired for isolation. The longer we go isolating, the more fierce the mean reversion when we eventually get back to “normal.” Since late February of this year, our ability to socialize, mingle, and interact at work and in our communities has been severely limited. Families clustered with just a few other families to stay inside their “protected network.” Employees left the office and set-up the work-from-home infrastructure. Little to no business travel occurred and recreation travel pivoted towards driving to destinations versus flying. We stopped trusting hotels and resorts and ultimately favored staying in a private home via Airbnb, HomeAway and VRBO. I’m writing this blog post on the day Airbnb goes public at almost two-times the proposed price from just a few days ago.

The Mean Reversion

As a social guy, I’m craving a time when I can go to a concert, fly somewhere for a fun vacation, or just visit friends I haven’t seen for almost a year. I’d be willing to bet the desire to dine out at our favorite restaurants is as high as it’s ever been. For many, a return to the gym will be a very exciting development. Millions of consumers are chomping at the bit to head to Las Vegas or other gambling destinations for some table and pool time. When all of these social habits return, and they will, even if altered slightly, a domino-effect will ensue and a whole group of laggard stocks should offer significant portfolio value. In the world of investing, it’s the rate of change that matters and many of these great brands have lagged this year and seem poised for a strong few years of business trends. Additionally, if we broaden out our spending and accelerate it in many cases, companies like Mastercard, Visa and American Express should have much better years.

When extreme things happen I like to use the rubber-band analogy to describe how behavior or price action can change according to how stretched the rubber band gets. Currently, if the rubber-band is social gatherings, it’s about as stretched as any of us would prefer it to be. Timing is always uncertain but the outcome is clear as day: we want to socialize, we want to gather, and we want to explore. And as a global society, this need and desire is extreme.

In a blog post during the meat of the pandemic and economic closures, I reminded readers that “nothing is more predictable than a consumers propensity to spend” and that when we see a historic drop-off in commerce (stretched rubber band), we should expect a viscious snap-back once the economy opened up again. Once the mean reversion snap-back was complete, retail sales and personal consumption expenditures would likely level off and gyrate for a period of months as consumers tried to get back to normal.  That part of the opportunity is now complete. The next big opportunity in my opinion is the rubber-band snap-back in the social gathering and experiences categories. Even if the timing is less certain, the path is very clear once it gets started.  We saw a glimpse of this in the late spring and summer as we saw a break in COVID-19 cases. Now, as global consumers are even more pent-up, the mean reversion to all things “social gathering” related could be epic.

2021 opportunities across important social gathering spending categories:

• Air travel – largely most people have been travelling to places within a drive. When we feel more confident in the peak of this wave and with vaccine adoption, we will get on airplanes again primarily for leisure travel. Business travel will start slow but over time we will crave seeing our clients and building new relationships in person.
• Cruising – I’m not a cruiser but from a demographic perspective, cruises are a top travel preference for a segment of the global population. With COVID-19 testing and vaccines and medical assistance on boats going forward, it’s clear that the cruise business will recover in a very big way. All of the cruise companies have raised capital as a bridge to the recovery and it wouldn’t shock me if all these companies were fully booked for 3 years at minimum.
• Lodging – when you fly or drive somewhere you have to stay somewhere. Before the pandemic, the hotel and resort brands were solid investments for investors. I believe they will be again. To be sure, our preferences for how to lodge has changed but with massive pent-up demand, I suspect every kind of lodging will be oversold for the next year or two. Looking at how the Airbnb IPO went today, I think the stock agrees.
• Eating out – the restaurant industry has suffered greatly and there have already been so many casualties. It’s so very sad to see. Ironically, if someone has the funds to start a new eatery and has a virus-friendly concept, it’s likely never been as good a time to start a restaurant as it is currently. As an investor in public stocks, it’s harder to get direct exposure to this theme as most of the stocks are fast casual in nature versus the local restaurants we may love to visit. But a clear trend has emerged: the best restaurant brands have lost a significant amount of competition, now have massive store growth potential, have lower rents available, have a well supplied group of labor to choose from and will have a high demand world to serve. Chipotle and Starbucks have performed exceptionally well through this pandemic and will come out the other side even stronger.
• Physical retail – thank heavens for e-commerce and the ability to buy what we need from our couches but the stores that deliver an intriguing physical experience should see demand return in a big way. The pandemic will force a brand to adapt to different conditions and different buying habits but those that roll out the red carpet in stores or have a unique shopping experience should have very good business trends.

SUMMARY:

• Recessions and slowdowns happen, this slowdown has been historic and unique.
• Nothing will change humans from being social creatures – it’s a bankable thematic.
• The historic amount of pent-up demand for social gatherings is a very important investment theme for the next year+.

Disclosure:

This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.