It’s not easy for investors to place their bets amid a pandemic.
A second wave of COVID-19 may be a catalyst to keep the work-from-home and stay-at-home stocks surging even higher. But if a vaccine gets regulatory approval in the near term, then stocks benefiting from an economic rebound will get a stronger tailwind.
Given the uncertainty and potential market volatility, it pays to take a barbell approach and own stocks that can benefit from either scenario.
We asked three fund managers for one top pick for an ongoing COVID-19 play and another for a wager on economic recovery.
Nick Mersch, associate portfolio manager, Purpose Investments Inc.
His fund: Purpose Global Innovators Fund
The pick: Everbridge Inc. (EVBG-Q)
52-week range: US$59.85 to US$165.79 a share
The COVID-19 pandemic has been a tailwind for Everbridge in selling communication services to notify people of emergencies, Mr. Mersch says. The Burlington, Mass.-based leader in critical event management software can communicate on more than 100 types of devices with end-users in more than 200 countries and in 15 languages. In March, it launched a pandemic-specific offering called COVID-19 Shield to keep people safe (contact tracing) and businesses running. Its clients, which include businesses, governments and hospitals, pay a subscription fee. Everbridge’s stock trades at more than 13 times blended forward enterprise value to revenue, but the premium multiple is justified given its strong growth trajectory and high profit margins, he says. A risk is whether its aggressive sales and marketing can translate into sustainable revenue growth.
The pick: Real Matters Inc. (REAL-T)
52-week range: $7.74 to $33.01 a share
Real Matters, a provider of services to the mortgage lending and insurance industries, is a “conservative bet on a recovery,” Mr. Mersch says. The Markham, Ont.-based firm offers residential real estate appraisals, property insurance inspection as well as title and closing services to North American mortgage lenders. In Canada, the big banks are clients. However, 90 per cent of its revenue comes from the U.S. market. With interest rates at close to zero, Real Matters is benefiting from surging demand for mortgage refinancing, he says. Later in a recovery, it will get a tailwind from rising home purchases as consumers grow more confident. Real Matter’s stock trades reasonably, at about 16 times enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA), he says. A risk is large lenders bringing Real Matters' services in-house, but that is less likely due to its edge from owning a large appraisal-data collection.
Shane Obata, executive director and portfolio manager, Middlefield Capital Corp.
His fund: Middlefield U.S. Dividend Growers Class
The pick: Costco Wholesale Corp. (COST-Q)
52-week range: US$271.28 to US$363.67 a share
Costco’s stores have benefited from consumers stockpiling essentials during the pandemic, but it can still “perform well in any environment,” Mr. Obata says. The Issaquah, Wash.-based warehouse-club retailer sells everything from food to apparel, appliances and even gasoline. Its sales have grown annually over the past 20 years except for a decline in 2009. Given its low gross margins, “membership fees are quite important for profitability,” he notes. Costco’s stock is a bit expensive, trading at almost 37 times blended forward earnings, but it also has a return on invested capital of 12.62 per cent – or about two times the median for its industry group, he says. Risks include the potential for Costco’s strong e-commerce sales to cannibalize its store business and rising commodity costs for its gasoline business, or input costs for its Kirkland-brand products.
52-week range: US$60.05 to US$98.44 a share
Paris, France-based luxury-goods giant LVMH should benefit from an economic recovery given its diversified stable of iconic brands that have weathered past downturns, Mr. Obata says. LVMH’s 75 brands include Louis Vuitton, Moet & Chandon, Dom Perignon, Givenchy, Christian Dior and Sephora. The global company, which sells everything from champagne to handbags and perfumes, has seen sales grow annually for the past 20 years except in 2009 and 2015, he says. It also has exposure to the key China market, which has started recovering from COVID-19. LVMH cut its dividend recently, but that’s not a concern as that should return in a recovery, he says. Valuation is a risk because its stock trades at around 33 times blended forward earnings, but “we think it will continue to trade at a premium,” says Mr. Obata, whose fund holds this stock.
Rick Ummat, co-founder and portfolio manager, Jemekk Capital Management Inc.
His fund: Jemekk Long Short Fund
The pick: Docusign Inc. (DOCU-Q)
52-week range: US$55.80 to US$290.23 a share
The COVID-19 pandemic, which has required many employees to work and even finalize transactions from home, has been a tailwind for the electronic-signature company, Mr. Ummat says. San Francisco-based Docusign recently also reported better-than-expected second-quarter results and issued upbeat guidance. Given its high customer net retention rate, its “sticky relationship” with clients should continue to grow even in a post-COVID-19 climate, he says. Besides its e-signature technology, Docusign also offers a suite of services to prepare and manage contracts to the end. Although its stock trades expensively, at about 20 times fiscal 2022 sales, it’s worth owning because of the company’s strong growth trajectory, Mr. Ummat adds. Competition from software giant Adobe Inc., which has an e-signature offering, is a risk, but Docusign’s product currently is still superior, he says.
The pick: Aritzia Inc. (ATZ-T)
52-week range: $9.20 to $26.37 a share
The Vancouver-based women’s fashion retailer is poised to benefit from an economic recovery given its strong balance sheet, rising e-commerce sales and popularity in its target market, Mr. Ummat says. Vancouver-based Aritzia sells in-house clothing brands aimed at consumers from their teens to their adult working years. The company, which has 75 per cent of its stores in Canada and the rest in the United States, also is planning an aggressive expansion south of the border. Although it posted better-than-expected results in the quarter ended May 31, its stock has underperformed some U.S. retailers, he notes. Aritzia’s stock trades attractively, at almost 12 times fiscal 2021 EBITDA, he says. “The stock could be back to about $24 a share within six to 12 months.” A risk, Mr. Ummat adds, is a prolonged COVID-19 pandemic because Aritzia sells clothes “to be out of the house.”