Although many companies in consumer-oriented industries continue to struggle, others have benefitted from society’s need to socially distance. Here are five stocks that have successfully accelerated digital adoption through the pandemic along with three in hard-hit categories poised to thrive once coronavirus inoculations become widespread.
In general, we like companies that have strong, entrepreneurially minded management teams with clearly defined avenues to gain market share. While many people think only of high tech and e-commerce companies when it comes to disruption, we believe innovation can – and should – happen in any industry.
Although some companies have struggled with lower sales since March, others have found that the pandemic turned headwinds into tailwinds. In light of the new reality, we looked for companies that could use the downturn to their advantage. Ultimately, it was about finding the right management teams using the right business models and carrying the right balance sheets.
Carvana [NYSE: CVNA] (Carvana Co. 2.20% of portfolio), an online retailer of used cars, is one of many companies benefitting from increased e-commerce. We like it because it uses an innovative approach in a very fragmented market of about $1 trillion. Carvana’s direct-to-consumer model features no-haggle prices, making it a much better experience than going to a typical used car lot. It has grown from annual revenues of $853 million three years ago to about $5 billion this year. As the runaway industry leader, we believe Carvana can continue to grow its market share at a high level for many years even if significant competitors appear.
Another company that’s benefitting from the accelerated move to virtual interactions is (DocuSign [NASDAQ: DOCU] (DocuSign Inc. 3.22% of portfolio), in which we are long-term investors. DocuSign is now widely used in a variety of interactions – everything from signing for a package to buying a house. The company is building other services around the entire contract life cycle to make it even easier to conduct business digitally. Its ability to capture data and extract insightful analytics can also be monetized.
If anyone could’ve predicted the topsy turvy environment we’ve seen in 2020, they might have invested in Teladoc Health [NYSE: TDOC] (Teladoc 1.21% of portfolio), which allows doctors to meet with patients virtually. They might also want to consider companies in areas adjacent to telemedicine, such as remote patient monitoring, as well as applications and software that will allow providers to securely deploy health care outside of institutional settings.
It’s no surprise that people are acutely focused on their surroundings since they’re spending so much time at home. One beneficiary of this trend is Trex [NYSE: TREX] (1.67% of portfolio), which manufactures decking, railings and other outdoor items from recycled materials such as plastic bags. When we made our initial investment in 2013, non-wood deck products had around 10% of the overall market. Today it’s up to approximately 20%. As the category leader, we believe Trex has room to grow.
Since people aren’t spending money on out-of-home dining and entertainment, they’re redirecting their funds into self-care, which can mean spending more money on food eaten at home and focusing on healthy choices. Vital Farms [NASDAQ: VITL] (0.51% of portfolio) maintains about 80% of the free-range egg market and has grown as consumers learned the differences between ordinary eggs and organic, free-range eggs, which taste vastly superior. And with more attention being paid to environmental, social and governance (ESG) factors, it doesn’t hurt that the chickens are treated more humanely by Vital’s network of farmers. If these trends continue, the free-range egg category may steal market share and Vital Farms is poised to be the leader.
While Covid may have been the catalyst for the recent growth of these companies, the shifting consumer habits and buying patterns it provoked aren’t changing anytime soon. While restaurants, airlines, hotels, movie theaters and others focused on travel and leisure continue to struggle, there are some companies that are poised to recover quickly as the coronavirus vaccine becomes more widely available. Three companies we like are Expedia [NASDAQ: EXPE] (1.51% of portfolio), Performance Food Group [NYSE: PFGC] (1.92% of portfolio) and Uber [NYSE: UBER] (1.47% of portfolio). Although their industries are pressured, each has the right elements to overtake weaker competitors when the economy improves in 2021.
Aram Green is a portfolio manager and managing director at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
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