As the World Recovers From the COVID-19 Pandemic, a New Investment Landscape Is Emerging
With COVID-19 vaccinations underway worldwide, expectations of a return to normal have begun to grow. But that normal won’t exactly be the one we left behind in March 2020.
This new reality will certainly create new investment opportunities.
After the destruction of the first quarter, 2020 saw recovery and share price gains in some of the obvious targets—stocks savaged in the early days of spring, and then snapped up by smart money players with a higher propensity for risk.
Some think the game is already over. “It’s natural to think in the post-COVID world there will be more use of technology and the internet. Well, those opportunities have already been amply explored by the market and are very fully priced,” says Rob Arnott, partner and chairman of Research Affiliates, an index creator, asset allocator, and research firm in Newport Beach, Calif.
That assessment, however, depends on your outlook. There’s a good case to be made for above average capital accretion in many of those very stocks over the five-year horizon.
The investing landscape has settled into a profoundly different new normal. Patrick Fruzzetti, managing director of Rosenau Group at Hightower says “We have a stock market driven by a handful of large-cap tech darlings, a weaker U.S. dollar, an unprecedented budget deficit, record money supply produced by central banks, and a global bond market with over $15 trillion in bonds with negative yields.”
Moreover, experts say that in some ways, the pandemic may have permanently changed our behaviors, so while some stay-at-home stocks may suffer as restrictions are lifted, it won’t be universal. We’re ordering groceries from the comfort of our own kitchens, watching movies on our televisions and, for some, cutting out commutes entirely. People aren’t likely to give all that up even when they’re able to.
We’re seeing increased reliance on technology, which has been crucial not only for maintaining personal connectedness during lock-down, but also for business resilience by enabling organizations to survive, or even thrive. Technology has been an enabler for two reasons: allowing employees to work remotely and allowing consumers to continue making purchases.
We’re also witnessing an increase in the number of investors considering the social and environmental impact of their investment decisions, or ESG (environmental, social and corporate governance) investing.
The market downturn caused by the pandemic demonstrated what many sustainably-minded asset managers have been asserting for a while—ESG strategies are better at avoiding risk than traditional strategies. Investments in healthcare, technology and companies that prioritized employee safety panned out in 2020.
Bearing in mind the new market realities, as well as underlying secular trends going forward, a few sectors do have outstanding appeal.
Among the noteworthy—telemedicine and other cloud-based companies, travel and airlines, 5G, drones, green energy, and resources (in particular gold and copper)—all look to provide ample potential for above average returns.
Below are some especially exciting prospects that I’ve discovered…
My Top Sector Picks For a Post-Covid Future
If ever there was a sector with screamingly brilliant blue sky. Not only has the pandemic pushed regular, old-fashioned visits to the doctor’s office online, the advent of 5G super-fast connectivity will, in the future, allow for increasingly complex medical services, real-time telemetry, and advances in medical AI being provided online.
How big is the market? According to Grand View Research, the global digital health market grew from $95.8 billion in 2018 to $114.5 billion in 2019. And that number was expected to reach $144.4 billion in 2020.
My Top Telemedicine Picks
Perhaps the most well-known of the telehealth stocks is Teladoc Health (NYSE: TDOC). Because of its size, Teladoc has resources in place to match patients with licensed physicians to help investigate symptoms and to prescribe tests and medications. When necessary, the doctors can make referrals to specialists or emergency departments.
Despite its growth being interrupted by the March crash, shares of TDOC stock were up more than 170 percent in 2020. On its most recent earnings call, the company announced that new users across the platform increased by 60 percent, and new registrations were up 125 percent over the prior year.
Based on the company’s internal satisfaction numbers, this will have a long-term effect on the company’s revenue. Teladoc estimates its potential patient base at perhaps more than 1.1 billion people. That means it is currently only covering one percent of its massive addressable market.
Teladoc claims it can reduce healthcare costs by 28 percent, so patients will have a financial motive to continue using virtual healthcare.
1Life Healthcare (One Medical)
1Life Healthcare, also known as One Medical (NASDAQ: ONEM), is the new kid on the telehealth stocks block. The company began trading publicly in January. Since then, ONEM stock is up nearly 75 percent.
Patients pay the company a $199 annual fee. This gives them access to the company’s primary care physicians and services. In some cases, the company gives patients the ability to text their doctors to schedule same-day appointments.
CVS Health (NYSE: CVS) posted $66.8 billion in revenue in the last quarter. However, as of yet, telehealth provides only a small amount of the company’s revenue. But that could be changing.
According to CEO Larry J. Merlo, in a press release issued after the outbreak of the Covid-19 pandemic, “When facing any health crisis, including this pandemic, we’re uniquely positioned to understand consumer and patient needs and how to address them. This includes increasing access to medicine and virtual care.”
With $2.1 billion in net income last quarter, the company should be big enough to keep growing its own telehealth services while keeping Teladoc at arm’s length.
One of the catalysts driving the growth in telehealth are insurance companies, which are now agreeing to cover telehealth visits. Humana (NYSE: HUM) has made a significant investment in telehealth services.
Humana is not exactly a pure-play telehealth company. Still, HUM stock is up nearly 10 percent for the year despite dropping over 42 percent in March. One of the advantages of holding a mature stock like Humana is its dividend. Humana has increased that dividend in each of the last nine consecutive years.
Renewable Energy Growing Faster
Despite the insane warble from the flat-earthers who insist on burning dead dinosaurs to generate power, it has become increasingly obvious that renewables are soon going to dominate the energy sector.
The cost of renewable energy developments has declined to the point where they’re becoming cheaper than fossil fuels.
Onshore wind is less expensive in many areas than building a new combined cycle gas turbine, while solar is rapidly reaching that point. Many forecasters believe that solar will soon be the lowest cost supplier of bulk power.
The biggest direct impact President Trump had on the solar industry was implementing tariffs on solar panel imports in 2018. Tariffs are due to expire in 2022. President-elect Biden is seen as more friendly to the industry, which likely means fewer tariffs and lower costs for solar installations in coming years.
Even more important, the longer-term opportunity continues to broaden as companies and governments race to meet their pledges of a net-zero carbon future by 2050.
Solar energy has had an outstanding run in 2020, which may come as a surprise to investors, given the pandemic and all of the disruptions that have come with it. Enphase Energy (NASDAQ: ENPH), SolarEdge Technologies (NASDAQ: SEDG), SunPower (NASDAQ: SPWR), and Sunrun (NASDAQ: RUN) have led the charge and have all more than doubled, while JinkoSolar Holding (NYSE: JKS), Canadian Solar (NASDAQ: CSIQ), and First Solar (NASDAQ: FSLR) have all beaten the market.
My Top Renewable Energy Pick
One of the emerging opportunities in solar is a small Canadian company named Aurora Solar Technologies (OTC US: AACTF / TSX-V: ACU). The company’s success to date has been driven by engineering excellence and innovation.
Aurora develops, manufactures and markets inline quality control systems for the solar cell manufacturing industry, and sells to the world’s premier solar cell producers. In fact, Aurora was the first company to develop real manufacturing control systems for solar cell production.
Some would say that solar stocks look pricey by most traditional metrics, but keep in mind that the industry is entering a multi trillion-dollar energy market and has incredible potential for growth.
Bonus Sector—Air Travel
COVID-19 couldn’t have had a more severe impact on any sector than it has had on the travel business.
With relatively few people traveling, and facing global restrictions on international and inter-regional movement, the airline and the travel sectors in general have been devastated.
Yet, despite the bleak outlook for carriers in the first half of the year, many airline stocks recovered well the fourth quarter, and some analysts consider them fully-priced.
Others still see opportunity in this situation such as JetBlue Airways (NASDAQ: JBLU), Southwest Airlines (NYSE: LUV), Alaska Air Group (NYSE: ALK), and Delta Airlines (NYSE: DAL). For contrarians who have a longer term horizon for returns, Boeing (NYSE: BA) has had a tough go of it since the 737 Max debacle, but the company is a critical part of the US military/industrial complex, so don’t imagine that it’s going way.
And One More Thing….
Patrick Fruzzetti, managing director of Rosenau Group at Hightower, advises investors not to overlook what he views as one of the best opportunities of all—gold.
“It’s a hedge against inflation, and now we see it as an asset class that will increase over time,” he says. “If you think of your portfolio like an orchestra, gold has its place. Every asset has its own job.”
While we’re on the subject, gold goes hand-in-hand with copper. Copper, as I’ve noted often since the beginning of 2020, will continue to be hot, especially as the trend toward electrification of the world’s energy system picks up momentum.
It stands to reason, then, that gold/copper plays deserve a good look.
A Gold/Copper Company Worth a Look
One of the stocks I hold is Freeport Resources Inc. (OTCQB: FEERF / TSX-V: FRI / Frankfurt: 4XH.F). Freeport is adding the Star Mountains property in Papua New Guinea to its portfolio. Star Mountains is a potentially gigantic copper and gold porphyry project.
While Freeport is at early stages of corporate development, the Star Mountains property has seen $US50 million in exploration over the past several years. This junior company itself is backed by smart money, and when it comes to juniors, smart money backing is a big deal.
Using a 0.3 percent copper cut-off grade, the Star Mountains deposit is estimated to contain 210 million tonnes of Inferred Resource grading 0.4 percent copper and 0.4 g/t gold, for 2.9 million ounces of contained gold and 0.84 million tonnes (1.9 billion pounds) of contained copper. Using current prices for gold and copper, this is equivalent to approximately 5.7 million ounces of gold or 3.8 billion pounds of copper.
Check out my earlier article on a junior gold stock worth adding to your watchlist here.
Bargain Opportunities in 2021
As 2020 goes into the books, it will be remembered by most as a year of hardship, conflict, fear, and suffering. Others will recall it as a unique opportunity to pick up stocks at bargain basement prices.
While recovery now looks more real than it did prior to the approval of vaccines for COVID-19, and share prices have rebounded, there is still opportunity in the sectors we’ve talked about for savvy investors to establish positions in the hottest sectors going forward.
For stocks that show a solid recovery chart, there is always the opportunity to buy on dips. For emerging sectors, there is the opportunity to ride the next wave of growth as world economies begin to fire on all cylinders and the devastating losses we have all seen in 2020 start to fade into the past and new hope springs to life in 2021 and beyond.
Blake Desaulniers, Contributor
for Investors News Service
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DISCLOSURE: Freeport Resources is a Blake Desaulniers portfolio holding. Blake Desaulniers has not received any payment for the writing of this article.
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