Straddling the Pandemic and Post-Pandemic Markets

Imagine that you told your financial advisor 10 years ago that you wanted to structure your portfolio to reap gains from growth stocks and yet position for anticipated near-term outperformance from value stocks pummeled by recession.

And suppose you told your advisor that, because of their long-term price stability and reliable dividends, some of these same value stocks could ably serve as a bond alternative, as bonds would now be scoffed as an asset class offering return-free risk, an inversion of the classic descriptor.

Your advisor would probably tell you that any market warranting this approach would be the result of stars aligning strangely. Unless your advisor was around for the Spanish flu pandemic of 1917, he or she probably couldn’t have imagined people quarantining at home while spending more on technology and pining to get out to spend while congregating. But that’s the current market scenario.

Rotation to Value

While growth tech is continuing to run, it has slowed down, calling attention to unsustainably high P/E ratios that may be presaging a rise in value stocks. As of last month, tech stocks were trading at an average of about 31 times their 12-month forward earnings estimates, the highest level since anything dot-com was investors’ pyrite.

On the other hand, these ratios’ spread against those of some value sectors (e.g., industrials, at 24 times earnings) could be a sign that growth tech is peaking, signaling a market rotation value, among other early signs.​

Of course, some tech growth stocks will continue to deliver, but on a more mortal level. Meanwhile, you can take advantage of key sectors likely to rise down the road from economic recovery, though this may be delayed by the current second wave of the pandemic. As dividend aristocrats, some stocks in these sectors offer long-term relative price stability for asset preservation, along with reliable, increasing (and reliably increasing) dividends that are much higher than current bond yields on an after-tax basis. 

Key Sectors and Industries 

A strategy for the transition from the pandemic and post-pandemic market, seeking to optimally exploit both, would involve these sectors and industries:

Semiconductors

Long before the pandemic fueled revenue from sales of end-user tech products (devices, software and video games), this sector had momentum from sales to electric car manufacturers and data centers ramping up for 5G and the coming data tsunami. And this momentum will likely continue after the pandemic because microchips are the building blocks of tech products that we’re using more and more—in our phones, Pelotons and AI products (including refrigerators!) connected to the IoT (internet of things).

Microchips are becoming so prevalent that some analysts have called them the new oil. The returns workhorse and multi-market supplier Nvidia, as well as various names in the semiconductor indexes tracked by ETFs, such as SMH, should keep delivering for investors for years to come.

Among these, AMD made news in late October by announcing its acquisition of Xilinx, which will give it a presence in the data center and automobile markets. A few days later, Marvell technology group announced a deal to acquire chip manufacturer Inphi, producing a combined entity more competitive in the data center and infrastructure markets. This consolidation reflects intense competition, so also-rans will naturally wither, and major players will enjoy market aplenty as the chip market expands toward technological ubiquity.

Online retailing

As what were once new indulgences become long-term habit, ecommerce companies–notably Amazon—will likely continue to thrive, if history is any guide. The company’s stock has a long-term pattern of rising, plateauing and then rising again. Though competitors—including dividend aristocrat Wal-Mart Stores and, internationally, the monstrous Alibaba and its Latin American counterpart Mercado Libre—repeat business from Amazon Prime members wanting free shipping is a huge advantage.

Moreover, analyst Mark Mahaney of RBC believes that Amazon’s successful cloud computing arm, AWS, with additional pressure from Microsoft’s Azure cloud services, will probably edge out Google for this business.

Meanwhile, Mahaney says, Amazon is putting out its buckets while it rains by expanding its distribution capacity by about 50% in anticipation of continued pandemic-linked volume in the short term and new habits in the long term. Further, Amazon’s ad platform sales are continuing apace.

Consumer discretionary and consumer staples

The consumer staples company that comes immediately to mind is America’s number one retailer, Wal-Mart, which is also enjoying its position as the nation’s number two online retailer while its customers wait to shop IRL again.

Target, another aristocrat, has also ramped up its online business for the pandemic. Other aristocratic consumer staples stocks include Walgreens Boots Alliance (Walgreen’s pharmacy) and class B of Brown-Forman (wine and spirits). During and after the pandemic, people do and will need drugstores, and drinking at home is now more popular than ever. So is cooking at home. Consumer staples performers with good dividends include Kroger, Tyson Foods and Hormel Foods. 

Restaurants

An obvious comeback category, restaurants still standing will benefit from high pent-up demand—but picking winning chains is tough. A safer bet is to buy stocks of restaurant suppliers.

Sysco Corp.—with a 16 percent market share, the market leader in a crowded field of vendors (US Foods is number two)—is a dividend aristocrat nicely positioned for growth fueled by diners who’ve eaten way too much of their own cooking and to many soggy delivery pizzas.

Industrials and materials

In the next year or two, a long-discussed, chimeric Congressional infrastructure bill will probably become real, not because Congress will necessarily want to act but because it will have to. The country’s roads, bridges, railways, airports, communications networks and power grids are deteriorating to the point of hamstringing the economy; decay is now at a tipping point. And infrastructure improvements are popular with voters because they create jobs.

The names most poised to benefit include some producing products that incorporate data analysis and automation (again, microchips) to improve efficiency. A good example is aristocrat Caterpillar, whose line of humongous extractive vehicles includes fully automated models. CAT has perked up a bit since mid-August, perhaps reflecting early confidence in imminent infrastructure legislation.

Another industrial aristocrat to watch is Rockwell Automation, a process-control system manufacturer that recently inked a partnership with Microsoft. In materials, the strategy of investing in essentials means steel and concrete suppliers. Two that come to mind are aristocrat Nucor (a specialty steel manufacturer with sales for bridges, roads and construction pipes and tubes) and US Concrete. Analysts recently raised price targets for both companies.

Several years ago, a standard asset-preservation move would have been to put trimmings from appreciated stocks into bonds. But now, with bond yields so low and bond risk much higher, it makes more sense to put tech growth gains into the value stocks positioned to rise with economic recovery and a likely infrastructure bill. Thus, investors can straddle the transition from a pandemic to a post-pandemic market.

David Sheaff Gilreath, a certified financial planner, is a 39-year veteran of the financial service industry. He established Sheaff Brock Investment Advisors LLC, a portfolio management company based in Indianapolis, with partner Ron Brock in 2001. The firm manages over $1 billion in assets nationwide.