Stock ideas for the second half of 2021: is it time to sell those lockdown winners?

by Jonathan Adams
Stock ideas

The duration of the Covid-19 pandemic has seen some significant changes in consumer behaviour. We haven’t done much travelling, either as commuters to and from work or as tourists. And we haven’t spent much time in bars, restaurants, the cinema or any other public space that involves groups of people coming together.

But more of us have been buying more online, including shopping categories like groceries, and often for the first time. Our reliance on digital forms of entertainment and communication channels from film and television streaming to video games and video conferencing apps has increased.

Most of us haven’t been going into the office. But many have invested in our home offices and homes generally, inspired by spending more time there. Less time commuting has also opened up more opportunity for hobbies from gardening to fantasy role-play board games and jigsaws.

These changes to spending patterns have seen the fortunes of some companies rise and others fall. That’s been reflected in share price movements. The stock of companies that have benefitted from lockdown conditions throughout the pandemic has soared. While the valuations of those whose activities and revenues have been negatively impacted have slumped.

As is often the way with stock markets, there is a strong argument many of these positive and negative swings in fortune have been exaggerated. Valuations of lockdown winners may have risen higher than their long term growth rates, temporarily accelerated by pandemic conditions, justify.

And the inverse may well be the case for many businesses whose valuations have plunged in recent months. If these businesses were healthy before enforced changes to consumer patterns, is there any reason to suspect they won’t be again when the pandemic is behind us?

Of course, it’s not a simple equation. Some consumer behaviour patterns are suspected to have changed permanently and won’t simply return to their pre-pandemic status quo. Exactly which and to what extent we won’t know for some time yet.

These swings in fortune have created opportunities and risks for investors. The kind of returns that are usually built up over several years of a steadily evolving trend boosting a company’s fortunes have been concentrated into just several months. And the opposite has been true. Investors on the right side of these swings have made a lot of money in recent months. Others have suffered to the downside.

Investment ideas for the post-pandemic period

If there’s one thing we’ve learned in recent months, it is not to rely on anything being certain when it comes to assumptions on the timeline of this pandemic. There could still be twists and turns. But with mass vaccination programs well underway across the most economically developed regions of the world and an understanding poorer economies must be helped to do the same, there is relative confidence the end is now in sight.

Barring unforeseen circumstances, life is expected to return to something approaching pre-pandemic conditions from this summer on. This means consumer spending habits can be expected to change again, benefitting some companies and hurting others.

That will again open up investment opportunities and risks. Is it time to sell off those lockdown winners before their growth levels drop and investors sell-off? Or invest in companies whose value has plunged but can now expect to see demand for their products or services to return?

Let’s take a closer look at a selection of lockdown winners that might be worth holding on to, or selling off, as we move into the second half of 2021. And ideas for shares that could be set for recovery after a hard year.

Should you hang onto these 3 lockdown winners or bank profits now?

  1. Microsoft

One of the elder statesmen of big tech compared to the likes of Alphabet, Amazon and Facebook,  Microsoft’s Windows operating system for personal computers and Office professional efficiency software suite have dominated their markets for decades now. Despite its maturity as a company, Microsoft was founded in 1975, its share price still gained 40% last year.

That positive trend has continued this year with gains of close to 15% already, and the share price is now up by over 400% over the past 5 years.

msft

It might sound like it could be time to lock in profits from any investment in Microsoft shares already made over the past few years. But many experts are convinced Microsoft’s recent growth story still has plenty gas left in the tank.

Major investment in its Azure cloud computing platform are now paying off and it is a market expected to continue to grow quickly for some time still as large companies continue their cloud transformation. 5G and new technologies like augmented and virtual reality should further increase demand for Microsoft’s services and products.

Microsoft is also thought to be less vulnerable than most to international tax reforms targeting the biggest tech companies.

  1. Zoom Video Communications

Zoom, the company behind the video conferencing application of the same name, was already a high growth company before the onset of the Covid-19 pandemic. But, especially over the first months of lockdown, the app became so popular it turned into a verb as friends, families and colleagues were restricted to ‘Zooming’, with face-to-face contact ruled out.

zoom

The Zoom share price gained over 400% in 12 months, despite suffering a correction from its high point last October. The company makes most of its money from business users who pay a subscription fee which provides unlimited call time, the option to record sessions and cloud storage facilities.

Most personal users make use of the ‘freemium’ version of the app, which is free to use but limits calls to 30-minutes in duration and doesn’t include the recording and cloud storage features.

Despite the fact much of the world is now moving out of lockdown restrictions, Zoom’s ongoing prospects look strong. The ‘new normal’ for office workers look set to be a hybrid model that combines attendance at the office with working from home. That means remote communication tools will continue to be integral to most team-based work.

Zoom’s own forward guidance is for a 42% increase in sales over 2021 compared to 2020, despite the huge boost to revenues last year. The biggest question marks over the company is how well it holds its own against new competitors entering the market and if new revenue streams can be added.

For those who already own Zoom shares there’s a strong argument to hold on to them and there could even be plenty of growth still to come for new investors to benefit from. Not an obvious lockdown winner to sell out of by any means.

  1. Amazon

Up 368% over the past 5 years and almost 100% between March and a late-August high last year (the stock has gained almost 200,000% since the company went public in 1997) an investment in Amazon shares has been a consistently good investment decision at almost any time in its history as a public company. But at some point it has to be too late or time to bank profits, right?

amazin inc

At some point it will be. But there seems to be a good chance that moment won’t arrive for a while year.

Amazon’s core e-commerce business, its new push into online groceries and pharmaceuticals, its streaming service and AWS cloud computing business all benefitted significantly from the pandemic conditions of the past year and something. The company has succeeded in signing up over 200 million to its Amazon Prime subscription service, which costs £7.99 in the UK.

The company’s revenues grew from $75 billion (£53 billion) for the first three months of last year to $108.5 billion for the same period this year.

Some analysts believe the hugely profitable and high growth AWS business should be spun out of the much lower margin e-commerce business. But overall, Amazon’s future growth looks like it can only be halted by regulatory intervention. The company is sitting on a huge cash pile and is quick to reinvest it in new business opportunities.

Growth in e-commerce and cloud computing are both megatrends that will almost certainly continue at pace for the foreseeable future. If the G7 tax initiative is pushed through and Amazon’s e-commerce business is hit by higher taxes then the expected result would be a separation of it from AWS. Many believe that could see the value of the latter rocket, which would benefit shareholders in today’s combined company as they would receive shares in the spin-out.

There could be some turbulence for Amazon over the months ahead if e-commerce sees a post-pandemic drop-off. But there is little doubt over the long term trend. For existing shareholders, Amazon looks very much like a long term hold and there is still plenty to attract new investors despite historically high growth rates throughout the history of the company.

3 stocks hit hard by the pandemic but look primed for a strong recovery

Numerous healthy-looking businesses suddenly had the floor pulled out from under them by the Covid-19 pandemic and resulting lockdown restrictions. The reality is there wasn’t much companies in sectors like travel, hospitality, retail and office space etc., could have done to cushion themselves against the blow of their revenue streams being unexpectedly turned off almost overnight.

For most, it was simply a case of being in the wrong place at the wrong time. Despite government support through initiatives like the furlough scheme, the worst affected businesses have seen their finances hit hard. Many overheads simply couldn’t be cut and cash was haemorrhaged with shares issues and debt financing needed to plug the gap.

That is money that has to be repaid from future profits and investor shareholdings held on to have been diluted. But share prices have also been depressed as a result. As revenues return and losses turn back into profits the valuations of these companies would be expected to rise again, creating an opportunity for investors.

These 3 pandemic-disrupted companies look well-positioned to bounce back strongly.

  1. Ryanair

The Ryanair share price has actually now risen back beyond its level just ahead of the market sell-off starting last February when the extent of the coronavirus crisis became apparent, despite massive losses sustained over the past year.

ryanair holdings

But investor faith looks well-founded with Ryanair sitting on a healthy balance sheet that should allow it to take maximum advantage when international travel around Europe gets back to normal. The company has greater route and capacity flexibility than most of its peers and is expected to grow its share of the European short-haul flights market over the next several years.

  1. Volkswagen

The German automaker appears one of the traditional big guns best placed to adapt to the switch from internal combustion engine to electric vehicles and has been strategically repositioning its business for some time now.

volkswagen

The end of lockdown conditions is expected to result in a boost to new car sales in the near term. It also trades at a cheap-looking price-to-sales ratio of around 0.72 and its p/e ratio is 7.49. To put that into context, Tesla, the most popular play on the future of electric vehicles, trades at a p/e ratio of 677.

Even setting comparison with Tesla aside, Volkswagen has one of the lowest sets of valuation multiples in the industry. Combined with strong liquidity and the cash flow to support heavy investment in R&D and strategic acquisitions, the German automaker looks like an enticing prospect for the next several years.

  1. Diageo

One of the world’s biggest alcoholic drinks companies, Diageo was unsurprisingly hurt by the pandemic shutting down bars, restaurants and social life more generally. That blow was cushioned to some extent by shoppers buying more alcohol for domestic consumption and the share price has recovered well. But a return to social drinking will inevitably be a boost to the Guinness owner.

diageo plc

However, despite Guinness being among the best know drinks brands in the Diageo stable, the company is much more exposed to spirits than beers. Long term that’s a strategic plus with spirits becoming more popular in general in comparison to beers. The trend towards craft beers also means big international beer brands are seeing a trend of sliding sales.

But that’s not an issue for Diageo investors. Demand for spirits is growing especially quickly in emerging markets, which tend to have younger populations that will feed through into bigger drinking-age demographics over the next decade. Morningstar analysis expects 600 million new legal age drinkers to flow into Diageo’s pool of potential customers over the next 10 years.

We hope you’ve found these ideas useful. The onset of the pandemic changed consumer behaviour patterns drastically. And its gradual fading away will do the same. There will again be winners and losers. And for investors, plenty of opportunities to take advantage of a new swing in fortunes.



Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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