Portfolio Manager Jeremiah Buckley explains why he believes behavioral changes precipitated by the pandemic could help certain sectors and companies – particularly those with ample liquidity and sound balance sheets – emerge from the crisis in a position of relative strength.

Key Takeaways

  • As companies adjust to the current environment, those with stronger balance sheets and ample liquidity may be able to invest now to emerge in a position of strength relative to their competition once we emerge from this crisis.
  • While specific sectors and industries like travel and hospitality have been particularly hard hit, certain behavioral changes taking place during the pandemic could solidify long-term investment themes such as Software as a Service, mobile payments and health care innovation.
  • As the pandemic has circulated globally, progress made in other countries may inform the eventual path of recovery in the U.S., including which companies and industries are seeing a recovery and which are not, as well as how consumers are reacting to the new normal.

Jeremiah Buckley: The primary focus in companies in this very difficult environment has been to shore up liquidity. So a number of companies that are planning for a severe decline in GDP, especially in the second quarter, and then also weak GDP for the next couple of quarters as well. And so as they look through their cash flow estimates and liquidity options that they have, a lot of companies are focusing on drawing credit lines to the extent that they can, issuing debt in the investment-grade market, which has been very active. And these companies are trying to make sure that their balance sheet is in a great position, not only to get through this, but to be stronger on the other side of this and potentially take substantial amounts of market share on the other side of this.

Crises like these allow the best and the most sustainable companies, it gives them the opportunity to take advantage of companies that have weaker balance sheets, that haven’t been able to invest back in the business during this difficult time. It allows those stronger companies to invest in marketing and growing the business or potentially finding assets to acquire from distressed sellers as a result of liquidity concerns.

Given the unprecedented shutdown of commerce and the ability for people everywhere to be able to go outside their home and to frequent restaurants, etc., that has really put a substantial amount of pressure on the travel, hotel, restaurant and leisure industry. A lot of those companies will be issuing debt or will be borrowing from the government, either at high interest rate levels through public markets like we saw for a cruise line recently, or they will be having to give equity to the government as a result of getting funding from them as well.

And so these companies have really been impacted by this crisis. They have very little visibility on when demand might return. We have always focused on companies that control their own destiny, control that relationship with the customer, whether it be in footwear or even in industries like insurance. And so we believe even more than ever that direct relationship in companies being able to directly connect with consumers through a mobile relationship has become even more important than it ever has. And obviously, enabling that mobile relationship is the technology sector, whether it be the software providers or the technology service and providers, including consultants, who have worked with companies to help digitize their business, to help make their business more mobile, which has become even more important in a time period like this.

While all industries will be impacted by a dramatic decline in GDP as companies and consumers have to cut back their spending, we believe that a number of these sectors, once we get to the recovery phase of this crisis, will continue to benefit from these trends. We believe the shift to the cloud, given the economics and the value proposition to customers and enterprises, will continue to happen. We believe the shift to Software as a Service, given the flexibility that it allows their customers and the ease of use that it drives, will continue to grow and drive economic growth.  Once we get out of this, consumers will get even more used to buying things online, buying things through their mobile phone, and that will continue accelerating the transition of payments to mobile payments, and the payments companies will continue to benefit from that.

And lastly, which has been even more heightened by this crisis, is the importance of health care innovation. And we believe that the companies in this industry that continue to invest in R&D, that continue to focus on innovation, that provide more economical solutions for the health care professionals, but also better treatment and better outcomes for patients, we believe those companies will continue to succeed once we get out of this crisis.

So our portfolio management team is extremely lucky to have the global capabilities that we have from the research team, especially in a time like this where it is a global pandemic that has gone across the globe at different periods of times. It has been really helpful for us to talk to our agent analysts and see their research, as they were obviously early through this in experiencing this pandemic. And now we are in the early phases of recovering from the pandemic, and so the information that they can give us on which companies and which industries are seeing a recovery and which aren’t, which are slow to develop, how are consumers reacting to this new world, that is extremely helpful for us as we try to think about what the new normal is once we get out of this crisis.

We also have excellent analysts in London and in Europe, and they are providing us real time updates on how the European countries are dealing with this crisis and how they are recovering, are they getting closer to recovery, what are the actions that they are taking? And that helps give us some data points and some visibility into what it might look like in the United States and how it might impact local U.S. companies and also multinational companies.

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