The world won’t soon forget the pain of 2020, but plenty of investors have reason to cheer, given the market’s performance. The pattern is the same in retailing, but the chains that thrived during the pandemic now face questions about 2021.
Companies in the hottest areas of retail, from suppliers of essential goods to big-box chains and home-oriented players, saw sales at stores open at least a year soar during much of 2020, as people hunkering down at home flocked to stock their pantries. Some investors worry that when the threat of Covid-19 fades, so will the benefits for those firms.
Yet not all virus-era winners will lose their gains, says Michael Cuggino, president and portfolio manager at the Permanent Portfolio Family of Funds. He points to two of his firm’s long-term holdings,
(ticker: COST) and
(WSM), which rose 27% and 40%, respectively, in 2020.
“Both have done well this year for different but related reasons, and both firms were available to people,” he says.
That’s not to say that the stocks won’t face some pressure in the new year. There is the very real chance that some investors will be looking to rotate out of these winners and into more cyclical growth players after the pandemic.
Yet Cuggino argues that this kind of environment would still benefit Costco and Williams-Sonoma. “Costco, just because of their business, reputation, and intangible consumer brand, tends to perform regardless of macro conditions,” he said. “For Williams-Sonoma, if the economy is doing well post-pandemic and people are back to work, they will probably still be spending money [at retailers] like William-Sonoma.”
The differentiating factor between the winners that keep their gains and those that don’t is likely valuation. Cuggino pointed to Williams-Sonoma peer RH (RH), which soared well over 100%. He thinks it looks more vulnerable to this kind of capital reallocation, as investors look to move out of stocks that are trading richly compared with their sectors.
In addition, he says, Williams-Sonoma is still doing a lot of things right. “Its brands are in demand, it hit key market segments, and it’s been using technology for years in terms of ordering and fulfillment.”
Of course, naysayers will point to Costco’s multiple, which is at a premium not only to the broader market, as usual, but also to its own history. However, Cuggino is less concerned about valuation being a roadblock for this stock.
“The run just an incredible operation and they always have, and they’re in demand all the time…. they squeeze every last penny out of that business,” he says.
At the same time, he says, there is reason to believe that stocks overall can have another good year in 2021. The pandemic and its effects won’t disappear overnight, and there is concern about the priorities of a new administration.
Still, for the new year “the sense, at least right out of the gate, is that there’s sufficient liquidity, demand is good, there’s more of the condition we’re in, with a slant toward getting back to normal, and that bodes well,” Cuggino says. “And there’s nowhere else to go—bond yields don’t provide competition for income-oriented investors. So there are a lot of reasons why equities can continue to do well.”
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