Despite Positive Vaccine Outlook, Value Stocks May Still Find Themselves In Trouble Long-Term

The news of a COVID-19 vaccine from Pfizer Inc PFE and BioNTech BNTX offers more than a glimmer of hope, especially when the United States is consistently breaking its record on average daily infection rates. However, the rotation out of pandemic and stay-at-home stocks may be a knee jerk reaction if we take certain metrics into consideration.

First, despite the heart-warming vaccine news, we are still months away from widespread vaccination. Also, in the event of approval (which appears likely based on the FDA Advisory Committee's recommendation) there are still distribution and supply bottlenecks to deal with in ensuring that everyone gets the vaccine. This implies that people and businesses would still depend on technology to carry out their operations. 

Even when all these impediments are handled, there is still a large section of the population that could refuse to be vaccinated. Faced with nearly 10.5 million infections and over 240,000 deaths, many Americans rebuff at wearing a mask because they are convinced that coronavirus is not real. This category of people would definitely frown at the idea of getting vaccinated for a virus, which they assume to be non-existent. Such apathetic behavior implies that despite a vaccine, it may take U.S. health officials longer before they can flatten the curve of infection rates.

Second, even though the vaccine is key to reopening the economy, the companies which would benefit from the normalization of business activities are too weak to push themselves off the block when the starting pistol pops. The pandemic has shattered many businesses as social restrictions plunged demand in these sectors. 

Prior to the pandemic, many of these businesses were not financially healthy and already struggling. Airlines suffered from huge debt prior to the virus forcing the economy to lockdown. They have since accessed more loans from the government through Operation Warp Seed to plug their massive burn rate (with total debt for the industry projected to increase to nearly $550 billion by year-end).

Traditional retailers were already facing intense competition from online retailers such as Amazon.com Inc AMZN and Target Corporation TGT, which were luring away shoppers with the convenience of same-day delivery. Iconic department stores such as JC Penny JCPNQ and Forever 21 filed for bankruptcy because they could not keep up with the pace of demand. With the trajectory of movie viewing shifting towards streaming, cinema operators may also suffer a steep decline in revenue; with a few cinema operators already filing for bankruptcy under groaning economic conditions.

These companies, though benefitting from the reopening of the economy, may not have the financial capital to exploit opportunities that may present themselves. In contrast, the stay-at-home stocks are better equipped and positioned to benefit from an economic reset.

Companies such as Amazon, Netflix Inc NFLX, and Peloton Interactive Inc PTON, which benefited from the pandemic will continue to do so post-pandemic because of their huge cash reserves.

Over the last two quarters, Amazon has spent a whopping $4 billion on COVID-related costs but was still able to produce blow-out earnings. Amazon has also benefited from strategically using its revenue increase as leverage to expand its reach across multiple sectors. The company recently acquired a considerable stake in Deliveroo and is adding new locations to their service areas.

Based on this premise, while airlines would need a longer turn-around period and government intervention to get back to pre-pandemic levels, stay-at-home stocks flush with cash can quickly adapt and maintain their competitive advantage.

Another cursory point to note is that the pandemic has accelerated a change in retail trends and shopping. There is an increased emphasis on contactless service, which has altered traditional retail spending and shopping patterns. Crowded malls and restaurants seem to be a thing of the past as consumers would prefer the convenience that comes with online shopping. 

Similarly, vacation and holiday trends will also evolve. According to a study conducted by AirBnB Inc ABNB, many Americans are changing their vacation plans due to the newly adopted pandemic lifestyle. There is a growing preference for familiar vacation destinations over the more popular traditional ones. Rather than going to favorite tourist destinations such as Paris, Hong Kong, or Abu Dhabi, people are now exploring their own cities. Homes are fast replacing apartments as the premium space among travelers. Cottages with off beaten pathways are becoming a favorite among holiday seekers. 

This implies that businesses that depend on in-person experiences may be suffering a slow death because it is highly doubtful that people will socialize and mingle the same way they did prior to the pandemic. This shift in consumer tastes implies that stay-at-home stocks will be winners as people still depend heavily on technology. Online platforms such as Zoom Video Communications Inc ZM and 2U Inc TWOU will still be needed for teleconferencing. People will continue to favor conducting transactions through PayPal Inc PYPL over taking a trip to the bank. Many people will also want the convenience of streaming movies rather than heading out to the cinemas. 

This implies that the pandemic winners are already addressing the future needs of consumers,  while so-called value stocks may quickly become relics of a lost age, which brings us to the final point: most of the pandemic winners and stay-at-home stocks are tech-driven solutions to present and future problems.

Electric vehicles are a verifiable solution to climate change. Apple Inc AAPL has incorporated 5G wireless technology in its latest devices, even though the service is not readily available. PayPal has trailblazed the growing trend in digital transactions and has added bitcoin transactions to its platform, showing how back-footed value and cyclical stocks are in the face of changing social demands.

Based on the premise, the recent rotation into value and cyclical stocks is merely a knee-jerk reaction. The vaccine does not mean that value companies are out of the woods just yet as there are still financial challenges to contend with post-pandemic. Gains posted in value and cyclical sectors will be short-lived while the recent pullback in tech stocks is merely a blip. The clear winners are companies that have created solutions to address the future needs of their consumers.