Positioning for Post-Pandemic Recovery

Asset Management, Companies and Industries, Investment Themes, The Economy July 14, 2021

Positioning for Post-Pandemic Recovery

We made shifts within the Consumer Discretionary sector away from pandemic winners and into companies we believe will outperform in a recovery period. First, we trimmed our position in Amazon (tkr: AMZN) due to its stellar performance in the pandemic though it remains unclear as to what degree the surge in e-commerce spending will stick long term. Next, we trimmed another pandemic winner, Home Depot (tkr: HD), as it will be challenged by tough comparable statistics, supply chain issues and rising commodity costs, particularly in lumber. Alternatively, we bought a position in TJX Companies (tkr: TJX), which offers a unique “treasure hunt” experience for its shoppers. Since the pandemic, TJX has learned to operate with less inventory, earned better returns on digital marketing, strengthened relationships with vendors and cut borrowing costs, all of which will help TJX operate more efficiently for years to come. Pent-up travel demand is another investment theme we believe will flourish in a recovery, prompting us to buy a position in Booking Holdings (tkr: BKNG).

In the Healthcare sector, we sold our position in Quidel (tkr: QDEL), a point-of-care testing company, following a drop in stock price due to declines in COVID-19 testing. Quidel will also face tough comparable data which will further challenge the company in the near- to mid-term. We still like the company and would consider re-entering once results are back to a more normal growth trajectory. We sold our position in GlaxoSmithKline (tkr: GSK) due to disappointing failures with its COVID-19 vaccine and highly anticipated lung cancer drug, along with concerns regarding management, specifically the scientific leadership. GlaxoSmithKline is also spinning off its steady consumer segment, leaving the company left with more volatile segments. Lastly, we bought a position in Stryker (tkr: SYK), a medical devices company that acts as a one-stop-shop for hospitals and ambulatory surgery centers. Stryker is positioned to outperform due to pent up demand for elective procedures.

In the technology sector, we sold our positions in Oracle (tkr: ORCL) and Akamai (tkr: AKAM). Despite Oracle’s low valuation, the company is lagging peers on the transition to cloud. Additionally, management has continuously shifted segments around in its reports to hide decelerating growth and disappointing results. Akamai also has a low valuation, but we believe it has become a value trap. We expect the company to face difficult comparable earnings results in 2021 and growth expectations going forward remain low.

We added Target (tkr: TGT) to our Consumer Staples sector. Target offers a broad array of products in owned and known brand items at affordable prices. Its omnichannel fulfilment centers provides customers convenient ways to receive their items via in-store pickup, curbside pickup, same day shipping and regular shipping while simultaneously reducing operating costs. With a significantly lower valuation than peers and a unique operating strategy, Target is an attractive holding.

Lastly, we increased our exposure to international stocks, particularly in emerging markets. Emerging markets valuations are near 20-year lows relative to the S&P 500. A weakening U.S. dollar, higher commodity prices and inflation will all benefit emerging markets. Lastly, the emergence of a middle class, particularly in India, over the coming decades will drive further growth within emerging markets.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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