Quality stocks are going to be outperforming as we enter a post-pandemic environment, according to US equities expert Clare Hart, speaking at the Morningstar Investment Conference 2021.
Hart, who manages the Bronze-rated JP Morgan US Value, says there was a dramatic shift in preference for growth over value in 2020. However, she prefers taking a different approach.
“Companies are going to have to prove that they have business models that are sustainable, or that they have a very basic good product or service that people want and will want more of,” Hart says. “The companies that really dominate their space, that really have a new innovative technology or a new approach, they’re the ones that are going to pull ahead.”
Hart discussed five sectors her team has been allocating to during the pandemic – financials, industrials, technology, consumer and healthcare – and this is where she sees opportunities going forward.
Financials
The financial sector offers wider opportunities because of its several sub sectors: banks, credit card companies, asset managers, insurers, and so on. And so the different sectors has different levels of risk. Morgan Stanley (MS), for example, has over the past 10-15 years branched out from being investment banking focused to relying more on asset management – an industry with less volatility.
American Express (AXP) is another company that has done a great job managing their credit Hart argues. While business travel might not get back to pre-covid levels for a long time, the company is well positioned within the consumer, who might be trying to go more places and spend more on their cards as travel and entertainment is returning to our lives.
Another bank which has successfully mitigated credit risks is Citigroup (C), which JP Morgan thought were trading below book value – and the bank has been able to handle the covid recession better than the last financial crisis.
Industrials
In the industrial space, trends in electrification and sustainability are currently creating opportunities, while recessionary fears presented opportunities to add to high-quality companies with well-diversified end-markets and strong balance sheets.
In this space, Hart highlights Eaton (ETN), Trane Technologies (TT) and Deere (DE), where the last one has managed to develop proprietary Precision Ag farming technology to optimise yields and crops, thereby increasing cash flows.
Technology
Technology does not always revolve around the Top of Mind companies – several opportunities have revealed themselves as companies look to use technology to improve underlying businesses.
Semiconductor companies like Texas Instruments (TXN) and Analog Devices (ADI) stand out, according to Hart. For example, ADI provides cars with the AI technology to “feel” its surroundings, enabling them to turn headlights away and avoid blinding oncoming drivers, among other things.
Consumer
In 2020, the consumer space underwent an “acid test” for business models, seeing tremendous change. But, after a year of online shopping, Hart expects consumer spending to drive the economic recovery and create opportunities for rebound.
Several companies are even so-called “category killers”, that can capitalise on competitors’ weaknesses to gain market share, and Hart’s favourites include Best Buy (BBY), SYSCO (SYY), GAP (GPS) and TJX (TJX). TJX, which is reliant on customers coming to their shops, managed to navigate through lockdowns by suspending dividend, and is now able to purchase inventory from retail businesses that have gone bankrupt. It has also reinstated the dividend.
Healthcare
Lastly, health has been the biggest area of focus for many in the past year, and Hart says the coronavirus vaccine is more important for the overall market than any individual pharma company. In the space, companies with diverse pipelines and robust research and development budgets are set to profit. That includes Bristol Myers Squibb (BMY), UnitedHealth (UNH) and Medtronic.
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