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Royce Investment Partners: Three PMs on Covid-Driven Opportunities

By Lauren Romeo, Andrew Palen and Brendan Hartman

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Nov 03, 2021
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  • Lauren Romeo, Andrew Palen and Brendan Hartman discuss how businesses are adapting to the post-Covid world and the opportunities these changes are creating.
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Lauren Romeo The pandemic has highlighted the risks that have always been inherent throughout the global supply chain system, and we hold businesses that appear poised to benefit from the likely changes. The initial impact of course came from Chinese factories shutting down as COVID-19 first began to spread. In one form or another, however, the negative effects of supply chain disruptions have extended to the present day. Product shortages remain widespread as suppliers struggle to meet the spikes and shifts in demand as economies reopen and buying patterns change. All of this has laid bare the procurement vulnerabilities that many companies face.

As a result, many are re-evaluating their distribution processes to build greater, or any, redundancy and flexibility into their supply chains while also adapting to the increasing percentage of online transactions—a phenomenon that is affecting both B2C and B2B enterprises. Examples include on-shoring or near-shoring a portion of their production, carrying higher levels of safety stock, or investing in logistics to facilitate more efficient management of inventories, shipping, and delivery of final products. In addition, companies’ investments in automation and other industrial technology will be essential components of rethinking supply chains. Each of these actions will be critical to improving productivity and creating cost benefits that can make companies competitive relative to low-cost labor markets in Asia.

If the ongoing “Supply chain-aggedon” were not incentive enough, the U.S. labor force participation rate remains below pre-pandemic levels, which is making it difficult for companies to fill positions, including in manufacturing and logistics, further improving the return on investment case for increased automation. Companies such as John Bean Technologies (

JBT, Financial), which specializes in food processing equipment and automated solutions; Cognex (CGNX, Financial), which manufactures machine vision systems that can locate, guide, identify, inspect, and measure objects; and Manhattan Associates (MANH, Financial), which specializes in warehouse management and omnichannel fulfillment software, are examples of market leaders that appear poised to benefit from increases in corporate investment in industrial technology.

Andrew Palen The pandemic threw the dichotomy of knowledge workers versus on-location workers into sharp relief—and we’re seeking to take advantage of both. Many knowledge workers who initially transitioned to WFH or varying levels of hybrid during the pre-vaccine period are continuing to work that way, which has led companies to come up with digital transformation spending plans that reflect the growing permanence of these arrangements—for example, by evolving their respective operating models in terms of real estate, labor, and supply chains. On-location work is being affected by a different force—labor shortages that are leading not just to wage increases but also to the addressing of quality of life issues, including benefits, shift flexibility, training, and career path development. COVID has also created opportunities for companies to further reimagine operations by optimizing their productivity, and this has helped spur a rapid increase in automation and other productivity-enhancing tools. Many companies, for example, are increasingly looking to cloud-based software—which doesn’t have a supply chain and whose sales funnel is more hybrid than ever as much of what’s needed is delivered via the Internet, which creates an effective hedge against inflation.

In terms of specific holdings, Avid Technology (

AVID, Financial), which Chuck Royce (Trades, Portfolio) recently discussed, and Calix (CALX, Financial) both illustrate the post-COVID dynamics of empowering customers to navigate the new normal and drive attractive business outcomes. The pandemic greatly accelerated cord-cutting and expanded consumers’ need for broadband internet access. Calix is a mission-critical partner primarily to rural communication service providers (CSP), which account for 80%+ of revenue, that are grappling with this vastly increased demand that’s necessitating sizable investments in digital transformation. The company bundles hardware & software solutions with consultative resources while also showing its customer-centricity by white-labeling a constantly updated marketing library to help CSPs acquire more customers. This library consists of more than 3,300 pieces of content, including more than 200 videos, ready for multi-channel distribution over social media, search, and local TV. Calix’s share gains aren’t being disrupted by supply chain issues to the same degree as its competitors due to its fast-growing software mix and carefully curated supplier base. And the demand for broadband access solutions remains very strong despite the fact that infrastructure-driven spending is yet to begin. Calix has invested behind this strength by launching several total addressable market tools for its CSP customers that increase productivity, lower costs, improve the customer experience, and generate new revenue streams.

Brendan Hartman While the impact of COVID-19 on the economy, and hence the equity markets, has been pervasive, we’ve seen different levels of behavioral change occurring within different industries. Some of these changes, we believe, will be more permanent in nature, and others will be more temporary—on the assumption that COVID morphs from pandemic to endemic. One of the most significant changes has been the transition from office work to WFH, and the impact this phenomenon is having on technology usage and spending, as well as on office occupancy, restaurant and hotel usage, and on business travel. While leisure travel demand is recovering strongly from its pandemic-related downturn, for example, business travel has yet to rebound to pre-COVID levels. Many industry experts expect it could take several years before the business travel market recovers to 2019 levels.

We make no prediction as to the specific timing of this recovery, but we do hold companies that we think should continue to benefit from these pandemic-driven behavioral changes, in particular those related to consumer spending habits. The impact on home improvement and remodeling spending has been one of the most striking examples. While housing demand had been undersupplied for many years prior to COVID, the exodus from crowded cities to roomier suburban homes has been driving existing home sales to near record levels, which recently hit a 6.3 million annualized rate compared to around 5.4 million annualized units for the five years prior to 2020. This in turn has created a tremendous demand for repair and/or remodeling projects—typically kitchens, bathrooms, decks, and room additions. We own several stocks in the building materials and other housing related areas, such as Jeld-Wen (

JELD, Financial) (windows and doors), Unifi (UFI, Financial) (carpet fibers), Griffon Corporation (GFF, Financial) (home and building products), and Conn’s (CONN, Financial) (home appliances) to name a few. Each has so far been a direct beneficiary of increased spending on home improvement. Work from home—or WFH—has also increased consumers’ focus on their home office spaces, when many of us realized our outdated home office furniture and set ups weren’t up for the task of a 10-hour workday. Office furniture companies Steelcase (SCS, Financial) and MillerKnoll (MLKN, Financial), recently formed through the merger of Herman Miller and Knoll, have been benefiting from this trend. (This merger became effective on 11/1/21 and began trading under the symbol MLKN on Nasdaq.)

Ms. Romeo’s, Mr. Palen’s, and Mr. Hartman’s thoughts and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

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I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
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