The Next Phase

Friday Reflection | November 13, 2020

The Next Phase

Last weekend, the AP officially called the presidential election for Joe Biden. For some investors, there was a collective exhale; for others, a cautious look forward at possible changes to tax policy and a potentially split congress. Markets cheered the news of increased certainty and embraced the spirit of relentless adaptation this year has required.

The election news ended up being overshadowed by just about the only thing that could: positive news on a COVID vaccine. On Monday, Pfizer and BioNTech SE announced that current vaccine trials showed a 90% efficacy rate in their initial study of 43,538 people. Challenges remain with production, distribution, and adoption, but we now know that a successful vaccine exists, with additional candidates in ongoing development at other firms. This news allowed the market to move from the unknown timeline of vaccine development to the slightly more knowable timeline of the vaccine approval and distribution.

Prices in the US stock market jumped by as much as +3.5% early in the week, but the recognition that the virus is spiraling out of control has partially reversed those gains. This reflects the reality that vaccine distribution will take time, and that this is only an early glimpse of the light at the end of the tunnel. The pandemic will continue disrupting daily life for the foreseeable future, and short-term pressures of a surging virus will be weighed against longer-term confidence that vaccine development has reached a critical milestone.

Companies that have adapted to the altered landscape of social distancing have been the early winners; many of them are poised to build on that success in this next phase and even beyond the pandemic. Consumers, too, will not fully return to pre-pandemic patterns and are innovating in their own lives to accommodate the incremental realities of safe consumption.

Expanded digital infrastructure is the future backbone of growth and sales. Home Depot had been expanding its e-commerce capacity for years, and this year has seen a significant spike in online orders and curbside pick-up to meet skyrocketing demand for home projects. The company quickly repurposed parking lot space for garden and landscape products, driving sales higher.¹ Investors applauded these efforts, pushing HD stock up more than +27% this year. Target is another company that has leaned heavily into curbside pick-up, and they project this option will persist as the preference for many consumers. Beyond curbside pickup, home delivery has surged. DoorDash tripled their revenue versus last year, an impressive show of growth ahead of their upcoming December IPO.²

Other companies pivoted to take advantage of new product demand. We profiled Etsy a few weeks ago and their sellers’ nimble production of facemasks. Another example is Thermo Fisher, maker of laboratory instrumentation and life science tools, that pivoted their production to make rapid COVID tests. The company announced $2 billion in COVID-testing revenues in the third quarter, far exceeding the most bullish expectations.³

Outside of the corporate realm, UC Berkeley libraries have fast-tracked their efforts to scan thousands of books into their digital library. This massive undertaking, still primarily done by hand and one page at a time, will support the university’s transition to remote instruction options for current and future students. In addition to making the books available online, the text is now fully searchable in a way that can accelerate research efforts.

We can’t know which specific companies will adapt successfully, or how consumer preferences will further evolve as vaccines become effective in controlling the pandemic. We do believe these trends will yield a new phase of market growth, and we are excited for our clients to participate. The path is not likely to be smooth; the market rarely is.

As physical newspaper deliveries dwindled over recent decades, paper mills have shifted production to cardboard boxes for e-commerce deliveries and new sustainable packaging has emerged to meet demand. Looking forward, what new services or technologies will support the more efficient sanitization of hotels? What services will support conferences and sporting events that may operate at reduced capacity for months if not years to come? How will renewable energy companies support a more resilient grid in fire and hurricane threatened areas? What companies will be the infrastructure of vaccine delivery and storage?

Considerations such as the ones above strengthen our commitment to diversification, protecting liquidity needs, and periodically rebalancing portfolios to trim recent gains and add to undervalued opportunities. Like companies adapting to this new landscape, portfolios that approach adaptation as a continuous process rather than a static decision will be most resilient as we venture through this next phase together.

¹Companies that adapted to Covid-19 could be the winners after the vaccine as well. Published November 11, 2020. CNBC

²DoorDash IPO Filing Shows Big Revenue Growth, Profitable Quarter. Published November 13, 2020. Wall Street Journal

³Thermo Fisher Scientific Reports Third Quarter 2020 Results. Published October 21, 2020. NASDAQ Press Release