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The Managers Who Found Unlikely Covid-19 Winners
Boat makers. Home improvement retailers. Industrial real estate. These stocks have — improbably — crushed it this year.
The Covid-19 pandemic produced some obvious winners and losers for equity portfolio managers: Amazon and Zoom surged, while airlines and hotels tanked.
But some enterprising fund managers have wound up picking winners that, at first blush, wouldn’t seem like safe bets in the middle of a raging viral outbreak.
To wit: boating stocks.
An environment in which 12.6 million people are unemployed and the Standard & Poor’s 500 stock index is up just 1.5 percent may not seem like a natural time for people to run out and buy boats, a particularly expensive hobby. (An old joke posits that “boat” actually stands for Break Out Another Thousand.)
But Yaron Naymark, portfolio manager of New York based, value-focused hedge fund 1 Main Capital, was early to spot the potential for growth in anything related to outdoor activities as a result of the pandemic. With restaurants and movie theaters closed in many places, he reasoned, people would look for things to do outside — and away from crowds.
Sure enough, sporting goods of all stripes have been booming this year. That’s anecdotally obvious to anyone who has tried to buy a bicycle in the past few months, but it’s also borne out by the numbers: Naymark cites Walmart earnings calls in which management reported big growth in sales of all-terrain vehicles, among other outdoor-centric items.
His firm 1 Main has capitalized on the trend with investments in two boat manufacturers: Malibu Boats and MasterCraft Boat Holdings.
“Most new boat sales are to people who have been looking to replace boats,” Naymark explained. Over the past year, however, there has been a big uptick in first-time buyers, which created strong demand for manufacturers, he added.
Boat dealers don’t have enough inventory to deal with the current demand, and it will take manufacturers some time to replenish their inventory. That, coupled with pent-up demand for replacement buyers who are pausing those purchases until the economy improves, will add a new surge of buyers in 2021, Naymark believes.
Between those two trends and boat dealers looking to replenish inventory, “You’ll have three levels of demand, instead of just one,” he said. He noted that these trends also create a strong pricing environment for dealers and manufacturers, boosting potential margins.
“It’s going to be a huge tailwind for the boat manufacturers,” Naymark said.
Shares of Malibu are up 33 percent this year, while MasterCraft shares have climbed about 35 percent.
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As for 1 Main, it has gained 33 percent this year, without much exposure to the high-flying tech stocks that have boosted many other hedge funds. Naymark said the fund has gotten additional boosts from Limbach Holdings — a maker of mechanical systems for buildings that has benefitted from the increased focus on improvements in ventilation systems — and Hanesbrands, whose Champion line of athleisure wear started flying off the shelves as suddenly home-bound workers traded in suits for sweatpants.
Another Covid-19 winner that market watchers may not have predicted is the housing sector, and particularly the home improvement sector, according to Ross Seiden, portfolio manager for the Lazard US Sustainable Equity Portfolio at Lazard Asset Management.
“During typical recessions, the housing market doesn’t do so well and housing retailers don’t do well,” he said. “Earnings are poor during those periods,” and the stocks tend to plummet, Seiden explained.
Housing-related stocks did indeed sell off sharply at the start of the Covid-19 pandemic. But as consumers were suddenly forced to spend more time at home, they began to reallocate spending from travel and leisure to home improvement. Then came the economic stimulus, with consumers spending some of their checks on fixing up their homes, Seiden said.
He added that the gains in home-improvement stocks have held up in part because consumers are spending not just on one-time items, but on things like gardening, where they are likely to continue spending on upkeep beyond the initial one-time purchases.
“That is a Covid-specific dynamic,” said Seiden. “Sales for home improvement retailers have been robust, much more than you would have seen during any previous recessionary period.”
Shares of the two largest home improvement retailers, Home Depot and Lowe’s, have gained roughly 24 percent and 35 percent, respectively.
Seiden also cited the industrial real estate sector as another area that is typically hurt in recessionary periods but has enjoyed a boost this time around thanks to e-commerce retailers seeking more warehouse space. He said this dynamic has been playing out over the past few years, but has gained steam in the pandemic.
Shares of Prologis, a real-estate investment trust that invests in logistics facilities, have climbed about 9 percent.
On the flipside, Seiden said some e-commerce retailers have seen upwards of five-fold increases in their stocks, which may not be justified when life returns to normal. One example is online furniture shops.
“It’s more of a one-time purchase,” he said, citing couch buying as an example. “Consumer behavior for that type of purchase is much harder to shift than other types of purchases — but the market is telling you these gains are sustainable over the long term, which we think is unlikely.”
Long-short value investor Dan Kozlowski also sees certain stocks and sectors whose Covid-related gains look untenable in the future, particularly in the red-hot tech sector.
“We have performed deep work and shorted stocks whose values have become inflated by momentum flows into cloud and other theme based sectors,” Kozlowski, the founder and CIO of Plaisance Capital, said in an e-mail to Institutional Investor. “The market has begun to realize that many of these companies will have trouble growing into valuations that in some cases exceed the bubble valuations of the dot-com boom and subsequent bust.”