Why My Portfolio Was Built for the Pandemic
I’ve said it before, but my portfolio was built for the pandemic. For whatever reason, the businesses I like to invest in are doing well in these volatile times. But what has made these stocks strong, while others have suffered? Was it just luck, or was there skill on my part? I’d like to think it was a little bit of both, but who knows, introspection is tough.
I didn’t position my portfolio for a pandemic-induced recession (if someone told you they did, they are probably lying). But there are some qualities in the stocks I own that are now, because of recent societal trends, going to have even more momentum over the next few years. Let’s go through these trends and why I think they are investable.
But first, for disclosure/context, here are all the stocks I own in my individual portfolio:
Square (ticker: SQ)
Axon Enterprises (ticker: AAXN)
Spotify (ticker: SPOT)
Teladoc (ticker: TDOC)
Yext (ticker: YEXT)
MongoDB (ticker: MDB)
Activision Blizzard (ticker: ATVI)
Match Group (ticker: MTCH)
Electronic Arts (ticker: EA)
Altria Group (ticker: MO)*
Revolve Group (ticker: RVLV)
Boston Omaha (ticker: BOMN)*
Semler Scientific (ticker: SMLR)*
Roku (ticker: ROKU)
Stitch Fix (ticker: SFIX)
Bed Bath and Beyond (ticker: BBBY)*
I hesitate to call this work-from-home because people associate that with being trapped. But make no mistake, this pandemic accelerated the trend of decentralized work and will leave a mark on business culture for years to come.
Just today, Twitter announced it will allow employees to not come to the office ever again. If they want to go into an office they can, but the option of decentralized work is there for everyone. Expect most big companies to follow suit.
So who will benefit from this? One example I can think of is MongoDB. Their Atlas product is cloud-based and can be utilized from any browser. Users of MDB (i.e. other businesses) can run their IT/database in a decentralized manner. This gives them flexibility and is a reason why Atlas and other MongoDB products are the top options in the database industry.
Another company I think will enjoy greater use because of decentralized work is Match Group. A lot of people meet partners in the office, and that void will need to be filled. Enter Tinder, Hinge, OkCupid, and the other online dating properties Match Group owns.
An easy one. Gaming is a giant market ($160 billion in 2020) and is expected to grow to at least $200 billion by 2023. There’s a lot of revenue to be captured. Esports, live-streams, mobile, and new console cycles are long-term growth avenues for anyone attached to the industry. The pandemic just accelerated all these trends.
With no physical sports to watch, many people under-30 are increasingly choosing video games as their entertainment of choice. This is why EA and Activision Blizzard are solid bets to outperform the market over the next decade. Both companies own the best franchises outside of Fortnite, NBA 2K, and Red Dead Redemption (and maybe a few others I can’t remember). With high margins, strong capital return programs, and a huge opportunity for reinvestment, I now see very little holes in the gaming investment thesis.
I wrote a blog on why I am not selling my Teladoc shares a few weeks ago. Telehealth was already trending in the right direction, but the pandemic put it in overdrive. Demand is going through the roof, and I believe it will stay high post-corona when people realize it is the better way to meet your doctor.
Helping Small Businesses
With everyone at home, reliable and easy-to-use online tools for commerce, payments, and information will be in high demand. This is especially true for small and medium-sized businesses that can’t build these things themselves. Square and Yext are two examples of companies that build these tools (I’d include Shopify here to, but think the stock is wildly overpriced).
If you are a Square merchant, it is extremely easy to start selling online and offer curbside-pickup. This allows businesses to salvage some demand while they can’t open for physical customers. It also improves their relationship with Square, which will be good for shareholders long-term.
Yext partners with businesses to index their online information so it is reliable and up to date. This is currently very important. Their Answers product also helps companies index their website so it is easily searchable and up to par with something like Amazon or Wal-Mart.
Yext and Square do have exposure to smaller companies that may not be around after this crisis, which is something to watch out for as an investor. But over the long-term, I believe this pandemic has kicked owners into high-gear because they now realize online experience matters to the consumer. Square and Yext should benefit from this.
Macy’s, JC Penny, and other department stores are closed and headed for bankruptcy. Customers want to shop but are (or at least, some are) afraid of contracting the virus and don’t want to risk contamination. Many customers also don’t want to shop for clothes/fashionable items at Amazon, Wal-Mart, or Costco.
Revolve is more of a standard online department store where you can buy higher-end items. They also have low inventory levels and cycle through products quickly, which will help in this rapidly changing consumer environment. And to top it off, they are the number-one Instagram model partner and have started selling directly on the app (if you roll your eyes at this, I appreciate it because that means you are underestimating a huge opportunity for them).
Stitch fix is a styling service that delivers clothes through the mail. Customers come in contact with no one while getting their product, which gives them a huge leg up in this environment. Plus, I think the founder is one of the best new executives, right up there with Daniel Ek and Tobi Lutke.
Linear TV (i.e. Cable) has been dying for a while, but the pandemic has put the nail in the coffin. No live sports has thrown the industry in disarray, giving Netflix, Amazon Video, HBO, and Disney+ (non-live content with no advertisements) a huge advantage.
But who benefits the most from this accelerated transition? I believe it can be Roku. Roku is the CTV platform that connects people to their favorite services and runs advertisements when people use their device (in this case, the device is the TV). If you read their latest earnings report, you can see that while advertising demand is currently down, their usage numbers are growing quickly. Plus, only 3% of TV ad-spend is on CTV while 29% of the eyeballs are there. Supply will eventually meet demand, no doubt about it, and Roku will be there to scoop it up.
Two stocks I didn’t mention that will do well (or at least, their businesses will do well) during this time are Spotify and Axon Enterprises. Spotify because, well, on-demand audio is just better and easier to use for people in flexible working environments. Axon because they sell to law enforcement agencies which I believe makes them recession-proof.
If you have any concerns or think I am wrong, please comment below or on Twitter. Thank you for reading.
*I don’t think these stocks have benefitted from the pandemic.
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.