According to fund managers, these firms are benefiting from Covid-19 and their share prices are cheap.
Over the past 15 months, global stock markets have been in recovery mode with two themes shaping the direction of share prices and creating various winners.
The first trend that played out was the perceived winners of lockdown. Among the businesses that benefited from the ‘stay at home’ theme were technology firms, particularly those with strong cloud computing capabilities. In addition, investors flocked to businesses deemed ‘recession-proof’ due to their defensive characteristics, such as being market leaders in their respective fields.
Then in November, when the vaccine breakthroughs were announced, things changed. From this point on, there has been a rotation away from the expensive high ‘growth’ areas to the cheaper cyclical ‘value’ areas.
Positive vaccine progress has led to a pick-up in global economic growth expectations, which in turn has proved to be a favourable backdrop for value stocks that are more cyclical and economically sensitive, such as retailers, oil companies, airlines and housebuilders.
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During the value rally, some lockdown winners’ share prices fell notably. This, according to fund managers, has created buying opportunities.
Jamie Ross, fund manager of Henderson EuroTrust (LSE: HNE), cautions that “in investors’ eagerness to ‘play the recovery’ a lot of the companies that have structurally benefited from Covid-19 have been left behind”.
He adds: “It is clear to me that there are a number of companies that will be structural winners from the changes that occurred under Covid-19. New consumer habits are formed quickly and often prove stickier than envisaged. In many cases, Covid-19 simply sped up structural changes that were already taking place.”
He points out that “in many cases, the ‘Covid bounce’ in the share prices of these companies has been erased entirely and this potentially creates some interesting opportunities”.
One example is Delivery Hero (XETRA:DHER), the German online takeaway food delivery platform. Ross points out that the business prospered during Covid-19.
“It has many more customers and generally higher order frequency and spend rates per customer. We see these benefits as lasting and the early signs suggest that this could be right.”
However, since the shares peaked in late January, Ross points out that they have fallen around 15%.
Another example Ross highlights is Stillfront (OMX:SF), the Swedish mobile gaming company.
He explains: “Stillfront observed a meaningful pick up in customer activity and revenues in 2020 as lockdown restrictions gave consumers more time to spare for leisure-related activities and less outside options. It is likely that activity levels will slow somewhat this year, however, the growth of mobile gaming is a structural theme and consumers who re-engaged in gaming during periods of lockdown, may well continue these habits as restrictions ease.”
Ross adds that while this business should see lasting benefits from the past 18 months, the share price suggests otherwise, as the shares have fallen more than 25% since last September.
“Delivery Hero and Stillfront are just two examples of a general theme that we have observed across our portfolio and across the wider market; we are keenly focused on this and will look to take advantage of this where we can,” says Ross.
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Other fund managers have also been looking to take advantage of Covid-19 beneficiaries that are potentially being overlooked.
Kartik Kumar, co-manager of the Artemis Alpha Trust (LSE:ATS), picks out Just Eat (LSE:JET) as an example. “Its share price is 20% lower than it was prior to the pandemic, even though its business is over 50% larger. This is due to concerns over its £5.8 billion acquisition of the US platform, Grubhub, and the threat of competition in its dominant markets.
“We have increased our position significantly on the back of the weakness in Just Eat’s share price. We think it is both a short and long-term beneficiary of Covid.”
Kumar describes the company as having a “uniquely profitable mix of business compared to peers with its high margin revenues”.
He adds: “Its market share is multiple times larger than peers in major European markets. Last year its 60 million customers placed over 588 million orders. The combination of scale and profitability, with an energised founder-led management team, make it well placed to address competitive threats through investment.”
Elsewhere, Simon Edelsten, co-manager of the Mid Wynd International Investment Trust (LSE: MWY) and Artemis Global Select fund, points out that healthcare stocks generally have lagged this year, despite Covid-19.
One company that has bucked the trend is Moderna (NASDAQ:MRNA), which prior to its Covid-19 vaccine announcement was trading at $72. The share price now stands at just over $320.
Given the sharp share price rise, Moderna cannot be classed as being ‘overlooked’, but Edelsten argues that with a price/earnings valuation of six times it is undervalued.
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“We bought it recently on the grounds that mRNA vaccine-makers have had their science verified overnight by Covid. Moderna’s vaccine is highly effective and mass tested. The company is well placed to modify and develop vaccines to tackle variants more swiftly than traditional vaccine makers. mRNAs are seen as safer than adenoviruses (such as the AstraZeneca jab) for younger people and they don’t need to be refrigerated, so are easier to distribute in developing countries.”
Edelsten adds that the valuation attached to the share price is based on the “market assuming that we’re coming through the other side from Covid and Moderna’s work here is essentially done.
“But we will all be asked to continue vaccinating regularly against Covid. And don’t forget influenza. Traditional vaccine shots are only about 50% effective, which still slows the spread and keeps the magic RO number below one – but is a coin toss for the individual. mRNA vaccines could be so much more effective.
“It strikes me that Moderna will see the benefits of its role in the fight against Covid far into the future, and I don’t believe this is reflected in the price.”
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