The numbers we see related to the pandemic every day—from deaths to unemployment to shut-down businesses—are devastating, needless to say. And despite a wavering stock market rally begun in late March, no one knows when the economy will fully recover or what the lasting impact will be for investors.
But if we view the pandemic through a different economic lens, it has also accelerated major long-term trends that growth investors—those who build equity portfolios of companies expected to grow earnings faster than the market as a whole—have been following for some time. “Businesses and consumers are changing their behaviors and actively seeking out products and services that are more productive, cheaper, faster and more convenient,” says Mark Baribeau, head of global equities for Jennison Associates, the 50-year-old growth-oriented subsidiary of PGIM. “The result is a significant separation from the pack of companies with more innovative business models.”
Some of the biggest winners have come from direct-to-consumer retail, an emerging category encompassing e-commerce as well as omnichannel businesses with a strong ability to control their brand through direct interaction with their customers. Baribeau cites the example of an iconic athleisure wear brand that, like many retailers, initially took a hit to sales when it was forced to shut its physical locations in March. However, by the close of the company’s first fiscal quarter on May 3, it had seen a 70% surge in online purchases to the point e-commerce made up 54% of overall sales. “Online was always part of the company’s strategy, so this is no accident,” Baribeau says. “It’s just that when dress-for-work, exercise and shopping behaviors all changed, they were ready.”
And the pattern, he says, has been even more evident outside the U.S. in less-developed markets, where growth is typically occurring off a lower base. The leading e-commerce platform in Latin America, for example, posted first quarter net revenues of more than $650 million, up nearly 71% year over year. “In two months,” he says, “they’ve essentially taken a shortcut to penetration rates that otherwise would have taken three years.”
It is especially notable to find instances of such explosive growth in the midst of a deep global recession. According to Baribeau, this suggests that massive government stimulus programs designed to backstop consumer spending with income replacement for laid-off workers have been largely effective. Indeed, one of the looming questions in the U.S. heading into the fall will be what happens after key benefits are scheduled to expire in August before a vaccine is developed and activity fully resumes, which is not likely until next year.
However, the market’s divergent performance also suggests it is generally looking past the grim, top-line data and near-term question marks and focusing instead on the individual stories of transformation beneath. Another example of this “pulling forward,” Baribeau says, is playing out in the business-to-business technology sector. Gartner has forecasted that global IT spending will reach $3.5 trillion in 2020.1 It has now become apparent, Baribeau says, that within a few years most of that budget will have migrated to the cloud. The sudden shift to remote work is driving part of the acceleration, as a new cloud-based video-conferencing software saw its user base jump from 10 million to 200 million in three months, and a leading security software-as-a-service (SaaS) provider increased recurring revenue by 75% on the back of pushing anti-virus software to remote devices.
But it goes even beyond that, to the whole way organizations are having to respond to big changes, communicate with employees and customers, and deploy and monitor new technologies in the COVID-19 era, Baribeau says. He points to a cloud-based communications-as-a-service (CaaS) company whose software for ride-hailing apps allows users to tell drivers exactly where they’re waiting to be picked up. When ridership of these services plummeted this spring, the company’s stock price became collateral damage, but that was before a fuller picture of its lower-profile offerings in health care and education emerged. Usage in those verticals was skyrocketing, deploying the same technology to text telemedicine appointment reminders and call parents about changes to virtual class schedules.
The Next Wave
Longer term, Baribeau foresees habits formed during the era of social distancing leading to even more disruptive innovations in telemedicine, virtual education, automation and connected devices—all potentially fertile areas, he says, for growth investors to find the next generation of breakout stocks. The challenge as always will be identifying such companies early and often enough to offset the disappointments that are inherently part of the space.
For Baribeau and his team, the approach involves seeking companies with business models that are driving the structural shifts in their industries, exhibiting what he calls “long duration” growth potential and an ability to build a significant, sustainable competitive advantage. “It takes a huge amount of research by experienced analysts, but also a healthy amount of debate between strong personalities and points of view. It’s hard to be shy about expressing your opinion and do growth investing right.”
1Gartner Press Release. “Gartner Says Worldwide IT Spending to Decline 7.3% in 2020,” Gartner, July 13, 2020
Investing involves risk. Some investments have more risk than others. The investment return and principal value will fluctuate and an investor’s shares, when sold, may be worth more or less than the original cost. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Asset allocation and diversification do not assure a profit or protect against loss in declining markets. There is no guarantee an investment’s objectives will be achieved.
Jennison Associates is a registered investment advisor. Both are Prudential Financial companies. © 2020 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
1046122-00001-00 Ed: 03/2021
Wall Street Journal Custom Content is a unit of The Wall Street Journal advertising department. The Wall Street Journal news organization was not involved in the creation of this content.