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What are we looking for?

Companies in one of the hardest hit sectors in the current COVID-19 shutdown – consumer discretionary – through a lens of strong labour and supply chain management practices.

The screen

Using FactSet’s Universal Screening, we created a universe of stocks from the GICS consumer discretionary sector, representing the largest Canadian- and U.S.-listed companies selling nonessential consumer goods and services; 77 companies fit these criteria.

We then used labour management scores from MSCI ESG Research, a leading provider of environmental, social and governance data, reports and ratings, to compare the recoveries of our universe, from the recent lowest point of the markets on March 23 to the present. Supply chain management and employee well-being are two components of the labour management score, where the highest score is 10.

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What we found

Companies that scored the best in terms of labour management practices had more volatile stock prices than their peers. They also had lower credit ratings, which may help explain why they initially dropped so dramatically during the first half of March. When we looked at performance later in the month (March 23-April 6), we then saw a sharper-than-average rebound. The entire consumer discretionary sector in Canada and the United States experienced a recovery of 14 per cent over the specified time period, while the top 10 companies in our table saw an average increase of 22.3 per cent. The bottom 10 stocks in our universe returned only 9.4 per cent.

What explains this difference? It is hard to say with so many factors in play, such as solvency, but labour management is under increased scrutiny. There is increasing focus today on how companies treat staff and how able they are to deal with interrupted supply chains. Those that do well on both fronts could therefore be seen as being well-positioned to benefit when consumer demand begins to rebound from a combination of employee (and customer) loyalty – i.e. rewarding good behaviour – and effective stewardship of supply in the long term.

For example, Whirlpool Corp. had the biggest price rebound, climbing 44 per cent between March 23 and April 6. The company bottomed on March 23 and provided an update on business operations the following day, including a focus on its operating liquidity, which may have contributed to its sharp rebound. The nature of its business – i.e. appliances where sales depend on both a well-functioning supply chain and consumer choice – also points to strong labour management practices (where Whirlpool came in third) being a potential long-term benefit.

The company in our top 10 for labour management that performed worst was Expedia Group Inc., which only recovered 3.9 per cent. This drop makes sense given the collapse in travel.

Our conclusion? It is too soon to say whether strong labour management practices have a direct effect on stock price performance as the coronavirus crisis drags on. Factors such as liquidity or a complete collapse in consumer demand, at least in the case of Expedia, seem to matter more, at least right now. There are some indications, however, that companies that manage their teams and supply chains responsibly just might have a long-term advantage.

The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.

Select consumer discretionary stocks

CompanyTickerMkt. Cap. ($ Bil.)*Recent Close ($)*Labour Mgt. Score **Price Rtn. (%) March 23 - April 6Price Rtn. (%) Feb. 19 - April 6YTD Price Rtn. (%) 1Y Price Rtn. (%) Div. Yld. (%)
Hasbro Inc.HAS-Q12.9100.708.837.3-27.1-32.6-17.73.8
Best Buy Co. Inc.BBY-N19.485.078.618.7-33.9-31.5-19.63.7
Whirlpool Corp.WHR-N7.3130.817.544.0-37.2-37.3-32.05.2
D.R. Horton Inc.DHI-N16.652.127.024.7-40.4-30.1-15.41.9
Tiffany & Co.TIF-N21.9181.277.05.3-4.5-
Expedia Group Inc.EXPE-Q9.274.726.93.9-56.7-51.1-56.92.6
Under Armour Inc.UAA-N4.612.716.611.5-45.7-58.4-58.80.0
NVR Inc.NVR-N12.33,806.456.523.7-32.1-29.3-6.20.0
Stars Group Inc.TSGI-T7.627.986.327.5-16.3-17.410.90.0
Gildan ActivewearGIL-T3.919.505.826.2-46.1-49.2-60.24.2

Source: FactSet

* Market cap and recent close shown in CAD; percentage price changes in local currency. Data as of April 6. ** MSCI ESG, Labor Management Key Issue scores. 

Shirley Li is a client solutions manager, Canada, for FactSet.

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