COVID Waves
The impact of Covid (on investing) has been on my mind lately. The pandemic is over, right? We can move on with our lives. But the implications for investing are still very much persistent. I don’t have any grand conclusions. I thought I would put this out there for posterity and to see if anyone has anything to add or build on from my observations.
For the sake of organization, I’m breaking this topic into three buckets (of investing impact):
COVID effect on discretionary retail: One of the most significant and immediate effects of COVID was the closure of physical locations. This was, of course, devastating to most retailers. Particularly mall and high street retailers such as the Gap, Abercrombie & Fitch, and American Eagle, to name just a few. Other retailers, such as Walmart and Target, were allowed to stay open primarily because they sold groceries and other goods. This also revealed who supported great online presence and service and those who did not. There was a mad scramble for some companies to improve their e-commerce offerings and services.
I recently read that consumer spending patterns returned to “normal” pre-covid trends. I enjoy investing in retail, so I have continued to follow the impact of retailers from COVID. Many second-order effects have made investing in this space confusing. One aspect is the “Bullwhip Effect.” This is a situation where a drastic change in demand and/or supply chain responsiveness impacts retailers’ ability to forecast orders accurately. In this case, retailers suffered from both problems: supply chains were a wreck, and demand patterns changed dramatically - sometimes for the better (outdoor and sporting goods equipment) and sometimes for the worse (autos and travel). When supply chains are interrupted, customers often over-order. Worried they won’t get their goods in time to support sales, they sometimes double order or order from multiple vendors. They hold higher inventory to prevent stockouts from unreliable transportation and delivery networks. Container shipping and trucking freight rates skyrocket.
Although we have largely recovered from the COVID impact, and supply chains and costs are normalizing, many companies still deal with bloated inventories, which is great for customers but difficult for retailers.
COVID impact on “Good” companies: One particularly insidious problem regarding investing is “over earning” (I hate that term but can’t think of a better one), which occurred during the pandemic. Using the sporting goods and outdoor category, which I like and follow, you can see great winners from COVID. Some very good companies were good before COVID and remain good after COVID. But how much of that demand was “real”? How much was pulled forward from future periods? Will earnings revert to pre-COVID trends? Some analysis I have seen has shown companies where sales have returned to 2019 trends. They essentially “look through” COVID. This may be shallow thinking in some cases. After all, if you buy a new mountain bike during COVID, you certainly don’t need another two years later. I have noticed more than one excellent investor that has interpreted COVID earnings as a break out to new sales levels for a company as they take market share or launch new products, only to realize that the new sales rates weren’t sustainable after all. Teasing out all the various impacts, even with good companies, is not as straightforward as it seems.
COVID triple whammies: Some companies had multiple challenges with COVID and no lift in demand. Some manufacturers fall into this category. Spending in their industry dried up. They were subjected to supply chain problems. And their employees couldn’t get to work. It was a true dumpster fire for a lot of these companies. Interestingly, to a degree, they are a bit easier to analyze post-COVID. If they survived and their demand recovered, they have a good chance of hitting their former run rates.
As you can see, COVID remains a hangover for investors. The factors listed above are my observations after studying a handful of companies and industries. I’m sure there are many more third and fourth-order effects. As well as a host of impacts I’m not even aware of. It is undoubtedly a confusing investing landscape. And where there is confusion, there may be opportunities.
I’m curious about what type of COVID hangover impacts you may see. Don’t hesitate to add any thoughts to the comments or drop me a line.