The world hasn't seen a status quo changing event like the COVID-19 pandemic in a long time.
Almost literally overnight, everyday life changed for hundreds of millions - maybe even billions - of people around the world. Daily commuting routines disappeared. Weekend nights out at restaurants, sporting events, and performing arts venues vanished. Family and friends gatherings became Zoom (ZM) meetings.
At some point, this will pass. Effective treatments, like Gilead's (GILD) remdesivir, are beginning to be discovered and worked into treatment routines. Antibody plasmas could be another treatment method. Already, hospitals have acquired sufficient personal protective equipment and added capacity. And ultimately, hopefully within a year or so, a vaccine will have been approved and ready for use.
Life will return to some semblance of "normal".
But it is going to take a while, and there are a lot of companies that are going to face dramatically altered business models in the process, potentially over a several year period.
In particular, we think these three industries face a very difficult period ahead - even after COVID-19 becomes just an accepted part of life. Some companies in these industries will survive, some won't, but almost all of them will face serious challenges over the next few years. We wouldn't go searching for any bargains in these spaces for quite a while...
Commercial Real Estate
One of the biggest trends during the COVID-19 lockdowns have been numerous very large companies moving to a majority work from home (WFH) model
WFH had already been a model gaining traction. It has its advantages. For employees, cutting out commutes saves literally hours a day, clears roads for truly necessary transportation activities, and even reduces air pollution. For employers, it allows their associates to be available 24/7. Technology has made many former office jobs location-neutral for about 20 years now. The percentage of workers working strictly from home reached 5.2% in 2017, up from 3.3% in 2000.
In the past 5 years, the acceleration of trends like cloud computing and mass collaboration software has made working from home ever more plausible. Fear of productivity loss, lowered collaboration, lack of management oversight, and just plain outdated thinking have prevented a larger adoption of WFH over that time period.
Well, that's no longer an excuse. For millions of people, WFH full-time has been a reality for almost 2 months now. The benefits - and drawbacks - are now clear to both employees and employers. It is very likely that a good portion of employees are going to demand the benefits they've seen from WFH - at least a few days a week. For employers, they are no doubt seeing that their businesses run just fine with a WFH workforce. The possibility of saving tens of millions on office space will be bandied about in boardrooms across America. Indeed, many very prominent companies have either announced a permanent transition, or spoken publicly about considering it.
Additionally, the COVID-19 lockdown has only accelerated retail e-commerce adoption. Online ordering and "touch-less" pickup models have become popular from restaurants like Chipotle (CMG) to big box retailers like Home Depot (HD). Pure e-commerce plays like Wayfair (W) and Amazon (AMZN) have reported robust sales growth.
Given the advantages of WFH and low-touch retail models, there are serious concerns about the outlook for commercial real estate in the near future.
Will a large number of corporations with a lot of white-collar office desk jobs move to WFH and/or "hoteling" models, decimating the demand for office space? Will more retailers and restaurants develop new models based around online ordering and pickup, reducing the need for on-premises retail areas?
Considering the U.S. already has way too much retail space, and that companies have been cramming workers into ever smaller office areas for years to cut costs, it seems highly likely that COVID-19 will only accelerate these already evolving trends.
Given this, avoiding commercial real estate plays, particularly REITs like Simon Property Group (SPG) or Boston Properties (BXP), seems like a good idea.
Live Or On-Premises Entertainment
The NBA was really out in front of this thing.
On March 11th, just before tip-off of a game between the Utah Jazz and Oklahoma City Thunder, the players were pulled off the floor abruptly and fans were told to leave.
As it turns out, Jazz center Rudy Gobert had tested positive for coronavirus. The NBA quickly suspended play. It hasn't played a game since.
Within the next week, virtually all major sports organizations, professional to high school, suspended their seasons as well. The NCAA basketball tournament was postponed, then canceled. Large concert events (SXSW, Coachella, New Orleans' Jazz Fest, etc.) followed suit. Movie theaters were shuttered in the wave of state lockdowns. Even Broadway shut down.
What is worse for these organizations is that, even with phased state re-opening plans, these mass gathering forms of entertainment have been placed into the final phases. That could put them many, many months from re-opening.
It is easy to understand why. With literally tens of thousands of people packed into small areas, close contact is unavoidable. The hard truth is that the virus is going to be around for some time, at least until a significant amount of people are vaccinated. Until that time, there is always a chance of contracting it. These kinds of venues are high risk for spread.
Even when phased re-openings are complete, it is not hard to imagine people systematically avoiding these kinds of mass gatherings for a while. Don't think for a moment that the fear and unease people have felt through this thing won't linger. It is going to affect attendance, particularly for something as fungible and replaceable as live entertainment.
Because of this, the stocks of companies that provide live or on-premises entertainment for mass groups of people are likely to suffer for a good period going forward. The ones that have weaker balance sheets may even struggle to survive. We're talking about concert and event providers like Live Nation (LYV) and Eventbrite (EB), amusement park operators like Six Flags (SIX) and Cedar Fair (FUN), and venue owners like Madison Square Garden Entertainment (MSGE) or AMC (AMC).
Travel Stocks
Finally, we come to maybe the most obvious cohort that will be hurt by the coronavirus fallout: travel stocks.
Travel was really the first thing affected. The U.S. restricted entry from China in late January. Major companies were restricting all non-essential travel as early as late February. It has even reached the unprecedented point of states clamping down on interstate travel!
Then there were the travel horror stories. Of coronavirus breaking out on cruise ships (which has its own Wikipedia page). Of travelers trapped in a foreign quarantine for months. Of unnerved travelers trying to make it back home in a panicked atmosphere.
Travel - particularly non-essential travel - is another facet of the economy that likely will not resume until late in the re-opening process. It involves large groups of people in close, confined quarters, essentially sharing high contact things like bathrooms, seats, and beds. People are going to think twice about taking a cruise, flying on a plane, or even staying in a hotel for a while.
Probably the most stark area of the travel industry that is going to be affected are the cruise lines. Ship air circulation systems do not do well with small particles like viruses, and as a result they tend to circulate diseases rather than filter them out. Cruises have been notorious for decades for disease outbreaks, and coronavirus is no different. Combined with very high expenses to operate, the cruise lines are stocks to be avoided for the foreseeable future.
Airlines are another. While they have better ventilation systems, the airline business model still involves packing people as closely together on a plane as possible. They have massive cost structures, both fixed and variable. COVID is having a very large impact, with some airlines cutting flights by 90%. Even in great economic times, airlines are a poor business due to their costs, lack of economic moat, and heavy competition. Facing years of demand decline now, many of them will not survive without government protection.
Then there are the hotel stocks. Certainly hotels are going to feel a pinch, as they are going to suffer from people opting not to fly to far away destinations, and/or deciding not to attend heavily populated attractions like sporting events or amusement parks. Business travel, as well, is likely to see a long-tail dip due to conditions mentioned earlier. However, we think hotels will probably recover somewhat faster than cruise ships or airlines. Vehicle travel is likely to increase, and hotels do not really involve packing a lot of people into very close quarters.
Conclusion
COVID is certainly going to have a long-term impact on the economy. This is an event that is going to leave its mark on billions of people for many years. Some of the past habits and ways of doing business are going to be altered. There will be winners because of this (we will talk about that in our next article), and losers as well.
Obviously, in time, things are going to rebound somewhat closer to old norms. People will fly again, attend sporting events again, and return to office work again.
The risk for investors is: when does that happen, and to what extent? Those are true unknowns that could have serious economic impact.
Remember, in investing, like baseball - YOU DON'T HAVE TO SWING! There are just far too many risks and unknowns in these 3 industries to go "value diving". In our experience, what look like great values in the stock market often turn out to be "value traps", or more visually, "falling knives" (you don't want to grab those, do you?). Maybe some of these industries do survive, things rebound to normal faster than expected, and current prices turn out to be great value. Or maybe people's habits are being irreversibly changed, and reduced business leads to bankruptcies and consolidations at awful prices.
Since we really don't know, it is just too risky. Best to find stocks of great companies with rising, recurring revenues and strong economic moats that can weather this storm regardless of the outcome.
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