Covid-19 upended the economy, turned the wheel of fortune for businesses and impacted the lives of many. Its effects are still unfolding even after 9 months since the outbreak started. The end is nowhere in sight.
Some businesses emerged as winners with obvious reasons – digital transformation accelerated by months, if not weeks. Zoom for meetings and classes. G-suite for work. Netflix for entertainment. Facebook for social connection. You name it.
There’s little wonder that tech stocks have been rallying and reporting solid financial results as we turn to digital solutions to stay connected and work remotely.
But in this article, I want to talk about the less obvious beneficiaries of Covid-19 and I have 3 listed stocks to share.
Pool Corporation (NASDAQ:POOL)
I couldn’t imagine people being in the mood of constructing swimming pools while the virus was killing people around the world. Who in the right mind would?
Hence, I found it ridiculous when I first saw Pool Corporation (NASDAQ:POOL)’s stock chart:
The share price has doubled between the bottom in March 2020 and hit the high in August 2020!
How could this be?!
The answer lies in the real estate market in the U.S – Americans are heading for the suburbs.
Look at the following stats:
- U.S. existing home sales shoot to near 14-year high in July
- U.S. Existing-Home Sales Rose Nearly 25% in July
- The number of Americans applying for home mortgages has hit an 11-year high
- Manhattan rents are falling for the first time in a decade
There are a myriad of drivers for the great home sales in the suburban areas.
The narrative goes something like this: remote work means you do not need to live in the cities and pay high rent. So you can now move to the suburbs and keep your job at the same time. The environment is probably more scenic and the pace less hectic. It was something you have dreamed of for a long time. On top of that, you are more likely to get infected in the city because of the close proximity with other people. Moreover, mortgage rates are cheap because the Fed printed so much money and brought down the interest rate to zero. So, suburban homes became attractive to the Americans.
Looking at this narrative, the most obvious beneficiaries would be the real estate agencies and construction companies.
Little did I expect that Americans love their pools so much that they want one in their backyard.
Pool Corporation had this to say in a recent presentation:
- Stay-at-home, remote work directives increased focus on the home environment
- Travel and leisure spending was re-directed to home-related investment
- Pool builders report an increase in orders and backlogs
- City dwellers are seeking safer, lower density environments
- Consumer behavior changes favor continued pool products spending
Business was so brisk that their 2020 revenue was estimated to grow twice as fast as their 5 year average.
However, they believe this is a short term phenomenon and long term growth would slow and revert to a revenue growth of 6-8% per year.
It was mainly due to the very encouraging financial performance from its 70.8%-owned Taiga Building Products. The company distributes lumber and other building products.
Thanks to the booming real estate market once again, lumber is in high demand to construct the suburban homes. Lumber prices have rose by about 50% since the start of the year.
Taiga released its 1H2020 results and net profits had jumped 87% despite the meager 1% revenue gain. This was possible because the margins increased significantly due to higher lumber prices.
The research team at KGI Securities set a minimum fair value of 43 cents (trading at 23 cents at the time of writing). They estimate Taiga’s 3Q2020 earnings to jump 78% q-o-q and that their $130 million inventory would be worth even more as timber prices have gone up.
Covid-19 has dealt a deadly blow to the travel industry. Many countries are still restricting travel. Who would have thought that a duty free business would have taken off?
One beneficiary is China Tourism Group Duty Free Corp (SSE:601888), its share price has more than doubled since the start of the year. The stock chart doesn’t seem to reflect the impact of Covid-19 and it is almost unthinkable considering that travel was one of the worst hit sectors.
China was the earliest to emerge from the lockdown and domestic travel had resumed months ago.
In fact, reports have been positive about the rapid recovery of domestic flights in China. It was expected that China would recover 100% of the domestic air travel in September 2020.
China Tourism Group Duty Free Corp is in the travel agency, duty-free and tourism investment businesses. Hence, it is expected to benefit from the recovery of domestic travel.
I also found out that the duty free business benefited from government policies too. For example, the annual duty free allowance for shoppers visiting Hainan was raised from RMB30,000 to RMB100,000 from 1 Jul 2020 onwards.
Also, the duty free group was quick to switch to selling online during COVID-19. It was a successful maneuver as online sales contributed to 50% of the Group’s revenue in May 2020, compared to less than 10% in January 2020.
Regardless, for a travel-related stock to double its share price during COVID-19, is still pretty much beyond my expectations.
There will always be surprises
These three examples show you that how difficult investing can be. It’s hard to think of second- or even third-order effects – it’s hard to connect the dots and determine that swimming pool sales will do well due to Covid-19. It is only obvious in hindsight. You would have missed these stocks if you waited for the statistics and reports to be made available – the share prices would have already gone up.
But we don’t need to sweat it. We don’t need to catch every opportunity as investors. Don’t try to attempt the difficult. Pick the easier battles and don’t be green with envy if you miss the best performing stocks. Expect the unexpected and be at peace with yourself.