There’s no precedent for what we are seeing today. When industries and small businesses are on lock-down and employees are without work and a paycheck, this is becoming real for individuals. The government, as usual is late to the party and spending all its time debating versus acting. Most of the population was complacent about the potential affects as they went about their day as if everything was normal. I am guilty of that myself. Optimistic Fatalism, it won’t happen to me, is likely a theme today. Our politicians did not get the correct facts to the public nor did they get solid information out to everyone to help them understand how to protect themselves. Now the markets are in freefall as revenues for many companies dry up on a short-term basis. Make no mistake, there will be significant damage to many small businesses that do not have the balance sheet cushion to wait this storm out. Many large companies will not look the same once we come out the other end. Anyone that tells you they know what will happen from here, is guessing. Now my rant is over, let’s talk about the opportunities inside of panic.
One of my good friends is a nurse and the doctors in her hospital have been circulating a checklist for people who want to make sure they have supplies if they get stuck at home and begin feeling sick. I’ve taken this list to Walgreens (a big beneficiary of this by the way) and have my basket of protection items waiting in the wings if I need them. Here’s the list:
Opportunities in Panic
Spending money and buying products and services is in the DNA of 7 billion people. The longer people hold back spending, the larger the snap-back in spending when it occurs. Yes, there will be financial hardship and corporate restructurings, this seems unavoidable at this point. We have to be focused today on protecting our health and changing our behavior for a period of time. Once we get a handle on the spread of this virus and attempt to back-stop companies and individuals, consumers will begin spending money on the things they want versus only the things they need. Having said that, let’s talk about where the opportunities live as we see some of the largest opportunities I have seen since the 2008-2009 financial crisis.
Where will people go when they feel confident to get back to their daily lives?
When you are stuck in your house or apartment for an extended period of time you begin to see what upgrades you need. It’s easy to put purchases on the back burner when you’re busy with life and work. I’ve been in a self-imposed lock-down for a few weeks other than going to the grocery store and drug store. When life gets back to normal, I suspect Home Depot, Lowes, Restoration Hardware, Williams Sonoma (Pottery Barn, West Elm, etc.) will see some serious traffic. All of these stocks are down 30% or more this far. That’s a wildly exciting opportunity for people that can look through the current turmoil.
Food & Beverages:
I’m already tired of eating the same things and craving some of my favorite food and beverages. The restaurants will be particularly hard hit but the high quality, publicly traded restaurant brands will see a radical return of traffic sometime between now and June I suspect. As with most industries, balance sheets matter most. The fast-casual brands with high brand relevancy and strong balance sheets are: Chipotle & Domino’s Pizza. Starbucks will see a surge in traffic once the lock-down abates. This wonderful brand that treats their employees wonderfully is down 40% in a month. It’s horrible to watch but a wildly amazing opportunity for investors. I suspect there will be some significant strategic M&A in this space as strong brands begin buying highly relevant brands that do not have the balance sheets to sustain a longer slowdown. A niche brand with a strong balance sheet is Monster Beverage. Energy drinks are a favorite of younger consumers here and abroad and the Monster brand is very sustainable. Coke is a part owner of Monster so they will be fine.
Media & Entertainment:
If you’re like me, you have been watching more TV than normal. Streaming movies and shows are undeniably seeing a surge. Verizon recently stated they were seeing a 12% surge in internet use over the last 30 days. They have accelerated their spending on infrastructure with the acceleration in traffic. Great brand, high dividend, solid balance sheet. I’m sure Netflix subscriptions are surging all over the world. My only concern is their need to tap the debt markets to pay for growth. When the debt market shut down and you need money, the short sellers get aggressive. Roku has to be benefitting as more people using the Roku platform sign up for new platforms like HBO, Showtime, Starz, etc. Our family has ordered three new subscriptions on Roku, so they get paid a part of that revenue. They have 33 million-plus people likely considering doing the same and the stock is down a whopping 56% in 1 month. I smell wicked opportunities there. Disney+, the new streaming service from iconic brand Disney should be doing fine although their theme parks and travel businesses are completely shut down. I want to buy Disney, but I do not think we are at a price that fully reflects the current damage across all their businesses. I simply cannot wait to buy Disney stock sometime in the next 30 days.
Are you listening to more music? I certainly am. I’m absolutely listening to more podcasts as well. Spotify is down 22% from the highs and has held up relatively well considering the damage in many other consumer names. It’s an asset light business, doesn’t have a business model that requires any personal contact and has a terrific balance sheet. Apple, Amazon, and Google are beneficiaries as well and those stocks are down 25% or more with enormously strong balance sheets. Those brands will survive and thrive in times like this. The strong always take market share in times of distress.
The gyms and cabin fever will be the norm. People will get outside when they can, and exercise has always freed the mind from stress and anxiety. I realized I need more exercise apparel and my wife needs more yoga pants. We are not shopping in our local community right now, but we absolutely are continuing to order online even if the delivery times are being stretched out. The most relevant brands serving these categories are also on mega sale. The greatest hedge against your spending is having the strength to invest in the brands we spend our money on. What brands benefit when spending comes back with verve? Nike stock is down 38% from the peak, LuluLemon is off 50%. Yes please, I can wait this out and am happy to buy more if panic drives this amazing brand lower. Adidas is another major beneficiary once the dust settles. The stock is also down 50% in a little over a month. These brands will see a surge of pent up demand spending once the virus gets contained and spending and activities begin in a big way. Plant Fitness is another beneficiary. The stock is down a whopping 71% in one month as sellers purge themselves of any retailer where people congregate. They have a solid balance sheet as well. I’ll discuss more spending beneficiaries next week.
Here are some bottom-line takeaway points to consider:
Our safety is first. Stay away from public gatherings and have a supply of what you may need if you start feeling ill.
- The government will have to back-stop more businesses than it did in the 2008/2009 crisis.
- Drastic times call for drastic measures and drastic fiscal stimulus measures will continue to roll in.
- The opportunities being created right now in some of the most iconic, most relevant brands serving global consumers only happen every decade or so. I will be taking advantage of these panic because I can look through the carnage and I understand human psychology.
- Spending is in our DNA, we can stop it for a time but when it comes back, and it will, the pent-up demand building will offer a breathtaking surge in revenues and stock prices. That is not a concert you want to miss.
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