How dogs turned $4b fundie cautiously contrarian

Which is where those dogs come in. What Eiswert describes as the greatest boom in dog ownership in history is symptomatic of the incredible changes in behaviour and spending patterns consumption sparked by COVID-19.

Boat sales have soared as spending previously earmarked for holidays has been redirected. Bikes and weight benches are sold out across America as people work from home and dodge public transport.

You’ve got to start to balance your portfolio for that post-COVID world. The great investors I’ve seen use their imagination.

— David Eiswert, T. Rowe Price fund manager

Sales of Peleton internet-enabled exercises bikes have soared as gyms have shut. Digital payments and e-commerce are through the roof – this Christmas will be the biggest in history for online shopping.

And of course, cocooning consumers have bought furry friends.

All of which has led investors to crowd into pandemic winners. Peleton stock is up fourfold since Wall Street bottomed in late March. DocuSign, which allows users to sign documents electronically, is up 146 per cent. Netflix has risen 60 per cent.

There’s even a COVID-19 dog trade: Zoetis, which makes pet vaccinations and is in Eiswert’s portfolio, is up 70 per cent since the March nadir.

But Eiswert argues there is a risk that investors have become too wrapped up in the COVID-19 world, such that they have completely discounted the possibility of the world getting back to normal.

Eiswert says when a vaccine arrives, the world will change again – people will travel again, and head back to the gym, and return to the office, and start holding those weddings that have been put off for 12 months.

But in his view, the market is discounting the possibility that we are likely to see a rotation away from the stocks that have surged during the pandemic and into cyclical stocks once the vaccine arrives.

“How do you make money next year? Is it the same stocks that are trading at these astronomical valuations on that COVID trade? The answer’s no,” Eiswert says.

“You’ve got to start to balance your portfolio for that post-COVID world. The great investors I’ve seen use their imagination.”

While Eiswert is not predicting a breakout in inflation, he does believe a post-COVID world might see shortages emerge.

For example, having stopped exploring for oil and resources in recent months, the world might find it needs more of both. We’ll likely need more trucks, and wide body planes. Eiswert expects that whoever wins the US presidential election in November, there are likely to be meaningful programs of infrastructure investment aimed at getting economic growth and incomes rising again. That too will be mildly inflationary.

Rates could even start to rise a little, particularly at the long end of the curve. That would be a boon for financial stocks, like his holding in Charles Schwab, which essentially makes money from interest rate spreads.

Other stocks he has recently added include Morgan Stanley, Mastercard, UK-headquartered construction equipment rental group Ashtead, and payments provider Square.

To be clear Eiswert is not advocating abandoning all of the COVID-19 winners. But he is thinking about what he calls impostors – firms that have done well during the pandemic, but will see their business models tested after it. Netflix is an example of business that is clearly not an impostor, he says, but Peleton is more questionable; history does not suggest humans are that good at maintaining their health.

Similarly, it’s important to be wary of value traps. There will be lots of property going cheap in the coming months, for example, but there are still structural issues to play out in some classes of the real estate market.

For local context, Macquarie analysts published research on Monday naming stocks they believe were best positioned in the event of a vaccine in early calendar 2021. BlueScope Steel, Fortescue Metals Group, LendLease, The Star Entertainment Group, Woolworths and Worley Parsons were the top blue-chip picks.

And if you’re wondering how Eiswert expects the dog trade to pan out, he’s actually less worried about it being wrecked by a big rotation. Many pandemic puppies will live for 15 years – and they might need even more care when the world goes back to the workplace.

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