'Stay at Home' Stocks Can Still Thrive Even When Covid-19 Retreats

Coronavirus social distancing in a store
Credit: Issei Kato / Reuters -

Over the last seven months or so, as stocks have recovered from the March lows that came in response to the coronavirus shutdown, the “stay at home” trade has been a pretty consistent winner. Stock in companies that have actually benefitted from the shift to home schooling and working from home have soared, losing little ground on positive news regarding the virus, but still pushing higher on negative reports. In most cases, there will be a correction to that move, but when Covid-19 is finally on the retreat, are there some that can continue to thrive?

The correction has to come in areas such as vaccine-related stocks. There are so many vaccine candidates that even if the successful ones can be sold worldwide at a commercially viable price, which is itself a questionable assumption, the total profit will be spread thinly. The same can also be said of therapies designed to treat the disease. They may have some efficacy for other, future viruses, but really, they will all be brought to market for a one-off, specific disease. Some of the companies involved, however, are being priced as if they are working on the next statin, with a massive patient population and consistent sales until patent expiration.

Another area of rapid growth that will, at best, level off as "normalcy" returns is home improvement. The numbers suggest that an enormous amount of Americans have, when they found themselves with more time at home and a stimulus check in hand, decided to tackle all those little jobs around the house that have been bugging them for so long. That is understandable, but when those jobs are done, what next? As the boom takes place, it is easy to forget that companies like Lowes (LOW) and Home Depot (HD) are essentially brick and mortar retail companies and will face the problems inherent in that once people return to work.

There are some areas where growth can be sustained, however, and they fall into two categories. The first is where things have changed and its effects lasting beyond the pandemic. The second is things that will change in the future as a result of it.

In the first category would be things like Zoom Video (ZM). There are a lot of people who say that the video conferencing obsession is a fad that will disappear with the disease. Is that true, though? Is it not more likely that people, on both a corporate and personal level, will continue to value the convenience and cost savings of virtual meetings versus flying to meet in person? To say nothing of still preferring to see the person they are communicating, with rather than just hearing them on a phone call?

A similar argument can be made for e-commerce stocks such as Amazon (AMZN) and Shopify (SHOP). There too, the change in consumer behavior is likely to prove sticky. The more often people use the convenience of online shopping, the more likely it is they will continue to do so. It could well be that the pandemic hasn’t really changed consumer behavior here -- it has simple accelerated a trend that was already underway. If that is the case, there is no reason to think we will turn around when the pandemic is defeated.

The second category is obviously a bit more difficult to evaluate, as it means predicting what will happen rather than looking at what already has occurred. That said, there are some things that can confidently be predicted. The first is that budgets for various states within the U.S. will be hit hard and as a result, state legislatures will be looking for alternative revenue sources. Once again, the best way to play this is probably to look for the possible acceleration of a trend that is already underway, and there are two industries that fit that bill.

First is cannabis. Pot stocks, as we all know, have been a bit of a disaster zone. They were high for a while, but came very quickly back to earth in most cases. The fact remains that there is a significant demand for cannabis, and that demand means that the product can be regulated and, of course, taxed. More legalization is coming, and that will benefit companies that have fared reasonably well in the rollercoaster ride of pot stocks so far, such as Canopy Growth (CGC).

Online gambling is another area of potential revenue for cash-strapped states too. Once again, it is something for which there is undeniable demand, whether legal or not. Companies like Draft Kings (DKNG) and Caesar’s (CZR), after their recent merger with British bookmaker William Hill, are in a position to benefit from that when it comes.

The Covid-19 pandemic has brought about some significant changes in everyday life and consumer behavior. Some of those changes will prove to be temporary, and some permanent. The trick for investors is to decide which are which, and a good starting point is to avoid things directly related to current conditions, such as the search for a virus or cure, and people catching up on overdue home improvement projects. Instead, investors should focus on trends that can continue, such as online shopping and the need for revenue at the state and local level.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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