Catalyst Funds
Rational Funds
Strategy Shares
Key Points
- There’s a convergence opportunity for investors in 2021.
- Vaccinations & COVID-fatigue are the catalyst for the convergence.
- Broad consumer spending across key services segments should benefit most.
My team and I are constantly looking forward, and trying to get into the mind of consumers to identify potential investment opportunities. 2020 was the year where portfolio concentration, expensive growth stocks and active trading was a winning trio. 2021 thus far has been the mirror opposite with value significantly outperforming growth and re-opening stocks and cyclicals offering strong portfolio value. As the vaccine rollout gains momentum and winter turns to spring and then summer, we see tremendous opportunities in the services part of the economy which has lagged badly behind the manufacturing sector. Yes, we are seeing a slight uptick in reported COVID-19 cases as more states open up and this should be expected. However, in our opinion, these upticks will be short-lived and fleeting. As opportunistic investors, we intend to use any short-term fear as an opportunity to add to the key brands operating across services and leisure categories. The airports are packed, planes are full, hotel prices are rising, and occupancy is rising which will lead to higher “rev-par” (revenue per available room) for hotel & lodging brands. Make no mistake, because of the demand coming, all of these businesses will have a short-term renaissance in pricing power which helps margins at a time when they need it most. The current year-over-year rates of change in rev-par will be the steepest in history as you can see in the chart below.
(Source: Goldman Sachs)
I’m not sure I have ever seen a time when consumers, here and abroad, were more pent-up to get out, explore and travel. In aggregate, consumer balance sheets are historically-strong and savings rates have gone vertical, likely to mean revert lower which means consumption capacity (accelerated spending) should rise to more normal levels. That strong and positive rate of change offers strong investment opportunities as we see them. Here’s the most important chart that few are talking about and highlights the opportunity we see as dedicated global consumer spending investors. This Spending vs. Consumption chart highlights two lines: estimated spending potential and actual consumption growth. As you can see, the two lines historically trend together but have diverged significantly since the beginning of COVID-19. Unless one thinks it’s different this time, and I absolutely do not, these two lines will converge once again in favor of consumers accelerating their spending as we head further into spring and summer. In my opinion, this is the most important opportunity in front of investors today.
As you can see from the dark line above, consumption growth has risen but is still around levels last seen at the depths of the 2008/2009 financial crisis. We know what happened after 2009 to consumption growth and we see no reason to suggest the same thing won’t happen as the economy opens more broadly and vaccinations become more wide-spread. The blue line is consumption capacity (estimated spending potential) and we fully expect the gap between consumption potential and consumption growth to get filled.
As active stock pickers, our job is to identify what consumer spending categories will experience the greatest year-over-year positive rate-of-change and which brands are the most relevant to serve these spending categories. We have a significant amount of tools at our disposal to help us identify these great investment opportunities and we are as excited about this year’s holdings as we were last year while serving a much different consumption environment.
Our portfolios have exposure to the most important brands serving some very large and important secular themes including:
- E-commerce
- Digital and mobile payments
- Social gaming
- Athleisure
- Connected fitness
- Cloud computing
- Streaming video and music
These themes have long tails and are nowhere near close to their termination dates. Coupled with these long-term themes, we are very excited about our re-opening and return to social gathering basket that is focused on many important services sectors like: restaurants, hotels, travel platforms, home sharing, airlines, and casinos.
In the end, what’s the fat pitch? It’s the key recognition that consumers will open their wallets and spend on things they want and need. In a world where the use of cash continues to deteriorate relative to the use of debit and credit cards, it seems prudent to invest in the brands that allow us to pay for items we want as well as the most desirable services we are pent up for. As a consumer myself, I couldn’t be more excited and interested in seeing friends and family, and getting on the road this spring and summer. When I’m there, I’ll eat out, buy important consumer goods and spend on the hobbies I enjoy the most. I suspect you will do the same which is the catalyst investors should be using for stock selection across this thematic.
With spring here and summer not far away we have money in our pocket to spend. The brands that matter most will garner a bigger share of our mind and wallet share which makes them very attractive investments indeed.
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.
