The short-lived rise of the lockdown winners is over, according to Blue Whale’s Stephen Yiu, who has warned that some of the pandemic’s favourite companies are not going to be viable moving forward.
Following the March 2020’s Covid sell-off, growth stocks experienced a sharp rally, with share prices spurred on by heightened demands for online products and services, which were needed as people adapted to the stay at home rules enforced across the majority of the world.
Companies such as Microsoft, Zoom, Amazon, Peloton and Ocado, all provided a service that enabled businesses and households to continue operating during some of the most intense months of the pandemic; the so-called ‘Covid winners’ or lockdown winners’.
However, many of these companies have taken a hit in the past few months, caught up in the technology and growth sell-off triggered by a market shift into value and cyclical themes. This move was in response to rising interest rates and inflation, factors that can materially damage the future earnings of growth companies.
However, FE fundinfo Alpha Manager Yiu, who runs the Blue Whale Growth fund, said his style would reassert itself as the market leader soon, but warned that not all the companies to flourish during the pandemic will recover from this sell-off.
The dynamics that enabled their outperformance have now gone, he said, as the world is no longer stuck at home.
He said that the lockdown bubble had burst and that many of the companies that did best during the pandemic were now “value traps”.
However, there were some nuances to this, such as picking between “sustainable pandemic winners, i.e. Microsoft” and “low-quality lockdown beneficiaries, i.e. Peloton, Robinhood, Zoom, Ocado, Deliveroo, and the majority of Cathie Wood’s ARK portfolio of companies”.
Taking videoconferencing firm Zoom as a prime example, the firm is unlikely to come back from this growth sell-off, according to Yiu.
Founded in 2011 the company was relatively unknown until 2020 when ‘Zoom’ became a colloquial term for virtual calls as people conducted meetings online.
But the company’s latest set of results were underwhelming, and according to Adam Vettese, an analyst at the social investment network eToro “provides confirmation that its pandemic growth surge is well and truly over”.
He said: “Zoom was one of the so-called lockdown winners that thrived when people were stuck at home, but it is struggling to maintain the breakneck growth rates it achieved earlier in the pandemic now that people are returning to offices.”
“It sounds bizarre to say this for a company that nobody had heard about two years ago and has since become a household name, but Zoom may have to adapt, react and maybe even reinvent itself if it is to thrive in the post-coronavirus world.”
Another stock Yiu was pessimistic about was Peloton, which the manager said “might not even be viable” by this time next year.
The American exercise equipment and media company shot to fame with its stationary exercise bike and subscription packages offering people a way to get in shape during lockdowns.
But since last summer, when Covid restrictions started to relax, its share price has plummeted 80% and it has been “burning” cash to stay afloat, according to Yiu.
The firm’s price also means it is struggling to retain customers or attract new ones, he said. Indeed, Peloton bikes cost between $1,495 and $2,495, not including the subscription to its virtual classes.
“Consumers are pretty smart they’re not going to spend $2,000 on a new bike if they think the service might not be viable this time next year,” Yiu said.
Yiu said both were a good example of companies that – as and when markets move out of this value-oriented environment – “may disappear when their cash runs out”.
He was not the only growth manager who had moved away from these so-called ‘lockdown winners’.
Fellow Alpha Manager, James Thomson, said he had sold out of several ‘stay home’ tech stocks, including Netflix, DeliveryHero, PayPal and Ocado in his Rathbone Global Opportunities fund last year to balance its overall tech exposure.
He said that early-stage, speculative and unprofitable tech companies had become “parabolic in recent years”, posting four-fold increases in just two years “as investors bid up the pandemic’s digital winners”.
Thomson added: “This had some echoes of a bubble as the hot air started to escape. Thankfully, these are not the type of stocks we would own.”
Like Yiu, he continued to back some of the popular lockdown stocks which he said had “resilience, longevity and gold standard growth”, including the likes of Microsoft, Adobe, Amazon and Google, which play a “mission critical role in our lives”.
Taking Microsoft as the prime example here, the software firm should be able to maintain its customer loyalty post-pandemic, said the managers – both of whom own the stock among their top 10 holdings.
This is even with a 20% price hike on its 365 programme – which includes Microsoft Teams – a raise brought in to deal with the rising costs created by higher inflation.
Yiu defended the price rise, stating the price increase translated to a just few extra dollars each month for a “critical service”.
“If you believe that the fundamentals of the company have not been changed, then despite the fact that interest rates have gone up, inflation is strong and there is conflict in Russia and Ukraine, you could argue the shares have become cheaper,” he said.
Microsoft’s share price has fallen by almost 15% year-to-date, according to Google Finance, and is down around 4% over the past six months, although it has been one of the best performers in the world over the longer term, up 759% over 10 years.