Barron’s Weekend Summary: Small businesses will be key to any recovery, but they face numerous pandemic-related challenges; The tech sector is optimistic about several upcoming IPOs
* Cover story: The coronavirus is affecting businesses of all sizes, but small companies—often with limited cash cushions and less access to credit than larger firms—are under the greatest assault; Small businesses are responsible for about half of US employment, half of gross domestic product, and 40% of total business revenue, and are key to the recovery, but investors seem to have largely discounted the threat their struggles pose for the broader economy.
* Tech Trader: Tech investors are growing increasingly optimistic, and though there have been few initial public offerings since the beginning of the year, new entrants—including subscription-based database company Zoominfo, online used-car dealership Vroom, construction management software maker Procore Technologies, payment processing startup Shift4 Payments, and Warner Music Group—are generating excitement.
* Trader: “What makes today different than the market’s all-time peak on February 19 is that the risks are now known—only the outcomes are unclear,” given the likelihood of a second wave of Covid-19 in the fall, a deep recession along the lines of the Great Depression, and growing tensions between the US and China, which are set to be a permanent part of the landscape; Market breadth—a gauge that looks at how many stocks are driving the market higher—is good for investors, the stock market, and the economy when it is wide, but today’s narrow breadth still presents opportunities for investors looking ahead to the second half of 2020.
* Interviews: Suzanne Clark, president of the US Chamber of Commerce, talks about the challenges that businesses are facing, what they need to get back on their feet, and the concerns businesses of all sizes continue to raise—and calls for the government to decide which five or six metrics are most important for reopening; Ben Inker, head of GMO’s asset allocation team, says that the recent rally in US stocks has more-than fully priced in an optimistic resolution to the coronavirus crisis, leaving investors in a dangerous position if something goes wrong—such that he has reduced the $60B firm’s stock allocation.
* Profile: Brian Yacktman and Elliott Savage, co-managers of the YCG Enhanced fund, look for quality businesses with high returns on tangible assets, but investment decisions hinge on whether companies have enduring pricing power in industries that are growing at least as fast as gross domestic product (top 10 holdings: MSCI, CBRE, MCO, MA, SCHW, GOOGL, WFC, BAC, MMC, AON).
* Features: 1) Positive on WMT, HD, LOW, TGT: Large, well-capitalized chains with big e-commerce units are growing rapidly, while smaller retailers such as URBN and KSS are struggling to remain relevant during the pandemic, a shift of balance in the sector that is likely to grow more pronounced; 2) + DBX: The company, an early cloud player that served as a blueprint for storage services from GOOGL, AAPL, and MSFT, is increasingly coming to the foreground and is benefiting from the fact that more people are staying at home and working remotely; shares, which remain below all-time highs, offer an opportunity to benefit from the trend; 3) “The convertible securities market has become an important source of rescue capital in the past two months for companies seeking to get through the current economic crisis,” with issuance this year totaling $44B, on pace to top the $53B sold last year; 4) The small-business sector might not seem like the ideal place to hunt for returns right now, but these companies—totaling more than 30M—are vital to the US economy and reeling from the coronavirus pandemic, and can pay off handsomely for investors looking to do some legwork; 5) The possibility that China could impose national-security laws on Hong Kong, limiting the city’s autonomy and ending its “one country, two systems” framework, creates a troubling scenario for investors, who may be forced to reassess China-focused investments—and there is clear risk ahead for companies trying to operate in the US and China, says Yale’s Stephen Roach; 6) Liquid alts—mutual funds or exchange-traded funds that mimic the investment strategies of hedge funds—were supposed to provide diversification and protection during crises, but instead losses have piled up during the coronavirus pandemic, though experts say demand for the products should nonetheless continue to rise; 7) “A violent selloff and equally rapid ascent in the stock market has caused mispricings and created massive disparities among sectors and stocks, giving actively managed mutual funds an opportunity to beat the index’s return, after lagging behind badly throughout the long bull market”; 8) Next month the FTSE Russell will rebalance its US equity indexes, but the pandemic is likely to shake up the tradition—this year’s reshuffle will feature particularly high turnover and changes in index weights because it follows a steep selloff and a rapid-but-uneven bounce off the market bottom.
* European Trader: Cautious on Adecco Group: The company, which generates most of its sales form providing temporary works to clients, has seen business drop off and shares fall amid the coronavirus pandemic, but the discounted stock is worth a gamble for investors betting on an economic recovery.
* Emerging Markets: Rumors of a corporate credit crisis in China are proving greatly exaggerated, at least for global bond investors—yields for many issuers have compressed by half since the panicky days of March, but current returns in the upper single digits may still be worth the risk.
* Commodities: Gold prices could reach a record by the end of the year, but investors shouldn’t expect to see a smooth ride to the top, even as measures to offset the pandemic-hit economy support the precious metal’s appeal as a haven.
* Streetwise: “A wave of retail earnings this past week seemed likely to highlight the very fragile state of the consumer,” says columnist Alex Eules. “Instead, we got a different message: E-commerce might just be saving the economy.”