Pick­ing win­ners in the pan­demic stock mar­ket

A great brand or busi­ness model is only part of suc­cess­ful for­mula, Diane Francis writes.

Calgary Herald - - FINANCIAL POST -

The grad­ual re­open­ing of so­ci­ety as COVID-19 in­fec­tion rates ebb is wel­come news, but the pan­demic’s ef­fects on the econ­omy are far from over. This is what is be­hind the mar­ket cor­rec­tion this week.

The big­gest ca­su­al­ties, in eco­nomic terms, will be any busi­ness that was mar­ginal, new or un­prof­itable be­fore the cri­sis struck. Their prog­no­sis is dim and most will re­main per­ma­nently shut­tered or limp through a lengthy re­cu­per­a­tion process. Sadly, the vic­tims will in­clude many of the small, im­mi­grant-owned or fam­ily owned restau­rants and con­ve­nience stores. But equally vul­ner­a­ble will be the large, es­tab­lished re­tail­ers with tiny mar­gins and high rents in posh lo­ca­tions. Many will suf­fer or dis­ap­pear.

An April sur­vey of 86,000 small Amer­i­can busi­nesses showed that 31 per cent of own­ers said they had al­ready gone out of busi­ness and 11 per cent ex­pected to fail within three months if cur­rent con­di­tions con­tin­ued. Taken to­day, those num­bers would un­doubt­edly be worse.

Over­all, eco­nomic con­di­tions will re­main lousy for ev­ery­one un­til a vac­cine erad­i­cates the pan­demic and the re­quire­ment for so­cial dis­tanc­ing. For in­stance, even though Star­bucks weath­ered the storm, it re­cently an­nounced that it will be clos­ing hun­dreds of its stores, in­clud­ing up to 200 in Canada.

Stock mar­kets are search­ing for three types of com­pa­nies: those that ben­e­fited from the cri­sis, those that will do well af­ter a vac­cine is dis­cov­ered and those that will ben­e­fit from the fail­ure of oth­ers, or from con­sol­i­da­tions. These sur­vivors will ra­tio­nal­ize their own op­er­a­tions, but also snap up com­peti­tors, thus shrink­ing the to­tal num­ber of jobs in the econ­omy. Un­der­pin­ning their busi­ness model is the re­al­ity that the eco­nomic pie will shrink rapidly and then grow slowly over a num­ber of years.

So, hunt­ing for the con­sol­ida­tors and re­open­ing cham­pi­ons is the name of the stock pick game. But hav­ing a great brand, busi­ness model or or­ga­ni­za­tion is only part of the for­mula for suc­cess. Those with low debt or no debt are prefer­able, most other things be­ing equal, than those sad­dled with over­heads. Thus, some are pick­ing the less-en­cum­bered United Air­lines over the in­debted Amer­i­can Air­lines, or lean dis­count chain Dol­lar Gen­eral ver­sus over-stored Macy’s.

Busi­nesses that have pros­pered — such as Zoom, Mi­crosoft, Net­flix and Ama­zon — also bode badly for the rest. For in­stance, re­mote work means less com­mer­cial real es­tate will be needed, main­tained and man­aged. On­line shop­ping means the per­ma­nent dis­ap­pear­ance of stores, malls and jobs. Home en­ter­tain­ment, such as Net­flix or Mi­crosoft’s video games, means the demise of many cin­e­mas, the­atres, are­nas, mu­se­ums and theme parks.

Rent re­lief has propped up some pub­lic-fac­ing busi­nesses, but so­cial dis­tanc­ing re­quire­ments in the ab­sence of a vac­cine blow up any busi­ness model based on clus­ter­ing or gath­er­ing — sports, en­ter­tain­ment, trans­porta­tion, cruises, theme parks and ea­ter­ies. Put sim­ply, a re­duc­tion in seats or ta­bles avail­able to cus­tomers equates to a dis­as­ter in terms of rev­enues. If a res­tau­rant is re­stricted to us­ing only half its ta­bles — and can­not dou­ble the cost of its food — it is doomed. Same ap­plies to air­planes, trains, the­atres and ball parks.

De­spite all this, as the econ­omy tanks and fal­ters, the stock mar­kets are boom­ing. This is partly be­cause stock mar­kets, mostly pun­ters in small vol­umes, have been op­ti­misti­cally over­stretched, cast­ing about for the Zooms and vac­cine mak­ers who will sail through this mess, ir­re­spec­tive of its du­ra­tion. Now they are do­ing the same search­ing for the re­open­ing or come­back kids. These are com­pa­nies, ac­cord­ing to stock pick­ers, that hit bot­tom dur­ing the cri­sis and will bounce back dur­ing the re­open­ing. This in­cludes com­pa­nies like Car­ni­val Cruises and Boe­ing. I ques­tion this logic, but go fig­ure.

My own take is that a vac­cine is at least a year away and this eco­nomic catas­tro­phe will go down in his­tory as a “flash de­pres­sion” that will dog eco­nomic growth and job cre­ation for half a decade. It’s not Ar­maged­don, but it’s cer­tainly tragic for all the vic­tims.

OLIVIER DOULIERY/AFP VIA GETTY IMAGES

The big­gest ca­su­al­ties in the era of re­mote work and on­line shop­ping will in­clude many small and large busi­nesses, in­clud­ing those tied to com­mer­cial real es­tate, says Diane Francis. De­spite tank­ing economies, the stock mar­kets are boom­ing, she ob­serves.

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