By now, most of us know the 2020 narrative about “stay-at-home” stocks and big tech having a great year while airlines, casinos, and hotels slumped. But is there a way investors could’ve identified the potential winners early? A deep dive into long-term societal trends might be key.
Winning stocks of 2020 benefited from shutdowns, but clues were there before the pandemic
Deep research into long-term trends might have helped identify 2020 winners early
As 2021 dawns, 2020 stock winners must focus on next steps in corporate development
Investors who enjoyed huge 2020 gains in the best-performing stocks while avoiding the worst reinforced how staying on top of emerging trends can sometimes better position investors for sudden upheaval.
Anyone claiming they knew a handful of obscure tech firms (whose products helped people work and play from home) would be the best 2020 performers isn’t being honest. The COVID-19 pandemic pulled these firms out of the shadows and into the spotlight as they enjoyed incredible growth rates. At the same time, companies caught in the eye of the hurricane, so to speak—airlines, cruise companies, casinos, hotels, and restaurants—struggled tremendously.
Going into 2020, firms like Teledoc Health (TDOC), Docusign (DOCU), Zoom (ZM), and Peloton (PTON) were already trading but didn’t have much of a following. Still, a few investors who’d done their homework were already shareholders or at least familiar enough with the firms to jump aboard early when the pandemic sunk its teeth into the economy.
These folks didn’t have ESP and thus didn’t know exactly how bad things would get or for how long. But for those who really did their research and were willing to dig into some up-and-coming companies with products everyone would supposedly want in five years, they saw their benefits pulled forward—a lot. This strategy is one to consider for coming years, even “normal” ones without worldwide shutdowns.
The idea is to focus on big structural themes pointing to where things might be two or three years down the road. This doesn’t mean investing in fads or flavors of the month like a hip-hop star who’s launching an apparel line. Think about really high-level developments, such as electric vehicles or cancer therapy. People who recognized the possible value of some of these 2020 big gainers early on were ones who figured out how to tap into emerging trends.
For instance, investors who’ve already researched TDOC because they recognized the developing theme of connectivity understood in March that people might not go see their doctors during a pandemic, helping TDOC’s business. But they didn’t stop there. They also observed a lot of people stuck at home would also look for e-commerce services, perhaps benefitting online retailers like Amazon (AMZN), Walmart (WMT), and Etsy (ETSY). Then they looked out even further and noted if online shopping picked up, so would home delivery, and they zeroed in on delivery options like FedEx (FDX). Check how those stocks performed in 2020.
Not that anyone necessarily sat down a year ago and went through that exact thought process, but you get the idea. Even if there isn’t an earth-shattering event in 2021, 2022, or beyond that speeds up transition to new products and technologies, the point is finding those trends, products, and companies and mapping out not when demand might come (because no one really knows), but who might benefit if it does.
Take a pen and paper and identify some key themes you think you’ll see over the next five years. This might mean electric cars, cloud computing, and immunotherapy for cancer (certainly you can think of many others if you take the time). Next, make a list of companies that might build the products people need if those trends take hold. Then draw your “family tree” out a few more branches to include companies that might serve the companies making those products.
For instance, focusing on electric cars probably would have brought you to Tesla (TSLA) two or three years ago, long before its stock went berserk in 2020. General Motors (GM) also got on the electric vehicle train a few years back, and its stock has benefited.
If you believe this is the way of the future, then go one level upstream and think about who supplies the batteries. Next, consider the infrastructure you need to charge batteries for people using electric vehicles. California wants all vehicles sold in 2035 to be zero emission, and nearly 40 million people live there. That means a few charging stations at the local mall might not cut it anymore. Which companies might have solutions to this infrastructure challenge?
Next, take it one step further, and start thinking about the infrastructure that would enable a world of electric vehicles. That brings you to possible huge demand for the physical commodities that go into making the vehicles themselves and the batteries and infrastructure that support them. We’re not naming any companies here, but you can see how to start your research.
If this were 1910, for instance, you might have invested in Ford (F), but then you would’ve looked ahead to a world with roadside motels and Howard Johnson’s restaurants, along with demand for gasoline and raw materials to build roads and parking garages. Maybe you’d consider jumping into the rubber market based on possible tire demand. Then think about the steel companies that would see demand heat up from F and its competitors. You didn’t necessarily think all this would be in place by, say, 1915, but if it happened over time, you’d be well positioned.
Heading into the pandemic, it was clear to some investors the future world would be a more connected one. That’s why some of them might have already been researching companies like TDOC and ZM or even owned the shares. They figured somewhere down the road—based on the themes they were seeing—these companies’ technology would be what people wanted. It turned out they didn’t have to wait long.
It’s not always possible to identify every long-term theme or all the companies that might eventually get lifted by rising tides. For now, let’s look just at the year ahead and consider how the best- and worst-performing companies of 2020 might do in 2021. This is when we reach the next step after finding companies that benefit from trends: identifying which ones have the best chance for continued success based on their leadership and business models. This can be tricky. For every Amazon, there were quite a few “Pets.com” that imploded when the dot-com bubble burst in 2000.
Although 500% gains in stocks like ZM helped make some investors nice profits this year, it’s not so cut-and-dried moving forward. Companies like ZM and DOCU have a lot of users, and that’s great. But how do they monetize those users, create efficiencies, and leverage multiple platforms into one offering? Not everyone can do it, and that could lead to more consolidation in tech, as we just saw with Salesforce (CRM) acquiring Slack (WORK).
It’s an imperfect science, but one way to find companies with down-the-road potential is to approach them like you would an initial public offering:
Start your research by asking the hard questions. If the outlook is unclear for a company, it might not be a candidate.
Focusing on some of the beaten-down areas of the market, like the Energy sector or the travel and tourism industry, there also might be some consolidation in 2021. If you’re trying to pick who might rebound, ask yourself who’s got the best solvency. Think like an investment banker as you look for opportunities out there. Some of the worst-performing 2020 companies no longer have business models or even entire industry infrastructures that work. The oil industry may not be able to support as many companies as it does now.
One question for 2021 is whether corporate travel or leisure travel returns first. If leisure travel bounces back but corporate doesn’t, this could affect United (UAL) and Delta (DAL) but could impact Southwest (LUV) differently. A drop in demand for fuel as more electric cars hit the streets means Energy might not have as much of a rebound as people think, even if the world goes back to working and flying.
As 2021 looms, consider sitting back and asking yourself what a post-virus world will look like. If you think things will go right back to the old ways, just dust off your 2016 playbook. If not (which is more likely), look from a high level and consider what’s going to be different. Less corporate travel and less people in offices have been two of the bigger trends. Starting with things like that and working down can help guide your investment thesis.
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