The Covid-19 pandemic, stay-at-home orders and economic shutdowns have accelerated the pace at which leading companies use innovation to disrupt business models and entire industries. Both the pandemic and this wave of innovation have increased opportunities for investors to potentially add value by establishing long positions in companies that are driving change and short exposure to the victims of innovation.
Five Changes Resulting from the Pandemic
Disruption of business models and consumer behavior extended across economic sectors during the pandemic. Examples include:
In many instances, disruption has left a trail of victims. Perhaps the most visible examples are traditional retailers, including Neiman Marcus, JC Penney and Lord & Taylor, filing for bankruptcy protection in 2020.
We believe this trend of disruption will continue even after the pandemic ends as consumers and businesses have grown accustomed to the many benefits of innovation, such as the convenience of online shopping or increased productivity resulting from employees working from home. We expect new innovations to support the convenience of the American consumer to crop up.
How Does Change Create Investment Opportunity?
By using in-depth fundamental research, skilled investors can potentially identify promising opportunities that benefit from change for long positions. In the process, they may also identify victims of change that may be attractive short candidates, thereby extending investment opportunities to businesses that are experiencing weakening fundamentals. To that extent, opportunities to add value with long and short positions may increase as the dispersion in the performance of equities increases.
Alger has been investing in innovation and disruption for more than 50 years and uses a bottom-up fundamental research process to identify potential winners and losers of change. The pandemic created compelling investment opportunities for the $40 billion investment manager.
Teladoc is an example of a long idea. Teladoc, a global provider of virtual health care services, started to experience increased demand for its services before the pandemic and enjoyed a surge in demand as patients embraced telemedicine to receive medical care while avoiding potential infections at clinics. Additionally, health care regulators have encouraged the adoption of telemedicine and have relaxed reimbursement restrictions for telemedicine visits, further accelerating this demand growth. The analysts at Alger believe that the additional demand generated from Covid-19 is accelerating the long-term secular trend of telemedicine adoption. Teladoc’s stock price increased in 2020 in response to the growing demand for the companies’ services.
Seritage Growth Properties is an example of a short idea. The company is a real estate investment trust. Its business model is predicated on finding tenants for big box, vacant retail spaces, which proved challenging even before the pandemic. However, the Covid-19 pandemic sparked a significant drop in demand for brick and mortar retail properties. Additionally, the company’s tenants include businesses like gyms, restaurants and movie theaters–most of which were shuttered due to the coronavirus lockdown. Those developments caused its share price to decline significantly in 2020.
Positioning a Portfolio to Help Clients Benefit from Change
Companies that embrace change have often rewarded investors by generating earnings growth while companies that failed to embrace change have frequently lost market share and experienced weakening fundamentals. We believe this growing divergence in the results of companies is durable and will extend beyond Covid-19. In our view, it is being driven by the acceleration of innovation throughout the economy. Innovation is an area of focus for Alger; we have been investing in innovation and disruption for more than 50 years and we believe we are very adept at identifying winners and losers amongst change. Alger’s investment team believes we are in the early innings of a technological revolution that will bring innovation and change for decades to come, creating rich opportunities for long/short investing.
Related links
Alger Podcast: Longing (and Shorting) for 2021
Alger Podcast: Is Hedged Equity a Cure for Volatility?
You can also learn more about long/short investing with Alger here.
This material is not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
Risk Disclosures - Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Investments in technology and healthcare companies may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Short sales could increase market exposure, magnifying losses and increasing volatility.
Short selling (or “selling short”) is a technique used by investors who try to profit from the falling price of a stock. It is the act of borrowing a security from a broker and selling it, with the understanding that it must later be bought back and returned to the broker. In order to engage in a short sale, an arrangement is made with a broker to borrow the security being sold short. In order to close out its short position, the security will be replaced by purchasing the security at the price prevailing at the time of replacement. A loss will be incurred if the price of the security sold short has increased since the time of the short sale and may experience a gain if the price has decreased since the short sale.
The following positions represented the noted percentages of Alger’s firm-wide assets as of December 31, 2020: Neiman Marcus, no position; JC Penney, no position; Lord & Taylor, no position; Teladoc Health Inc., 0.1%; Seritage Growth Properties, (0.0%).
This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds.
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