I’ve heard a lot of chatter recently that we’re reaching an inflection point with the economy. In short, the momentum is shifting towards a realisation that an end to the pandemic is near. This makes me wonder about the stocks I should buy right now. Should I be putting fresh money into stay-at-home stocks, or flip to back-to-work ones?
What are these stock types?
Stay-at-home stocks are those that have seen increased demand for their products or services offered during lockdowns. For example, I’d classify Ocado in this category due to the online grocery distribution network it operates. Another example is Zoom Video Communications. I think I’d struggle to find anyone who hasn’t been on a Zoom call over the past year.
Back-to-work stocks are the other side of the coin. These are companies that would benefit from me being out and about. An example here would be Starbucks or Greggs. Busy office worker traffic is a key contributor to business at outlets located in town centres and cities. Another example would be IAG. The British Airways owner would benefit from the increase in business and leisure travel that has been almost non-existent over the past year.
Before I go onto the stocks I should be buying now, what’s performed best over the past year? It’s no surprise that the stay-at-home stocks have outperformed. Depending on the level of diversification, some back-to-work stocks have offered fair performances. Others, (such as IAG) have seen a share price crash.
Which type of stock should I buy now?
I know this may sound like I’m sitting on the fence, but the answer is… it depends. The pandemic has been a unique experience, and so as much as I can group stocks into a cluster, not all perform exactly the same.
Given the optimism I have towards the economy, I’d generally be buying back-to-work stocks right now. IAG looks a bargain to me, as do other travel and tourism companies. But this doesn’t mean I’d sell stay-at-home stocks if I already owned them. Ocado is a well diversified business, with a growing technology arm. Even if demand growth for the grocery operation slows somewhat, I still think the share price can continue to perform as some consumer habits have shifted for good.
Would I buy stay-at-home stocks though? Yes, some of them at least. I’m sceptical about the prospects to profit from Zoom, and given that the share price is up 430% since December 2019, I wouldn’t buy. The valuation is very high, and I think this has priced-in the kind of growth it would see during stay-at-home periods. I don’t think this will come to fruition, so accept that this is a stock that I simply missed the boat on.
The risk to my view is simply that the pandemic may not be over. Another lockdown this winter would hit my back-to-work stocks like IAG hard. Ultimately, this is a risk I’ll have to live with. But for now, I would allocate more of my funds to back-to-work than stay-at-home companies.
But here’s an important point too. Regardless of the circumstances at any given point, I invest for the long term. Whether we’re in a lockdown or not, I look for shares I believe can go the distance and that I can hold for decades.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Starbucks and Zoom Video Communications and recommends the following options: short April 2021 $110 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.