November 2021 Newsletter: Standing Still

We haven’t made a lot of changes in our portfolio since COVID appeared. There are a few great reasons for that.

The first reason is probably best illustrated with the following graphs, showing how hard it would have been to time the investment market as consumer behavior changed due to COVID.

The first graph shows the stock price chart of two favorite “stay at home/work from home” stocks from March 1 to the present: Zoom Communications (ZM) and Peloton Interactive (PTON).

Both stocks soared as people stayed home. As the pandemic waned, they came crashing back to earth.

Likewise, if you had perfect prescience and knew a global pandemic was coming, you’d have probably wanted to sell any stock related to travel or events. The chart below shows two of those companies: Expedia (EXPE) and Live Nation Entertainment (LYV).

After an initial brutal drop, both stocks recovered and have gone on to post sizeable gains.

Many of the initial COVID winners have become losers, and many of the initial losers are now winners. With COVID still one of the major driving forces in the markets, you run the risk of your stock becoming a winner or loser based on COVID.

As we’ve seen, the trajectory of COVID is unknowable at this point with new variant(s) emerging. We had the Delta variant, which led to a wave of infections and hospitalizations. Now we have the new Omicron variant, which is potentially spreads more easily but may only cause mild symptoms (or so it seems as of now). Despite the new variant being perhaps more benign, we are seeing another round of travel restrictions and talk of partial lockdowns in some countries.

Contrast this with an example of the normal investment process. A few years ago, the stocks of auto parts retailers like Auto Zone, Advance Auto Parts, and O’Reilly’s were all down on fears that Amazon would run them out of business. Amazon had started to stock auto parts and was even offering same day or next day shipping in some locations in addition to the normal Prime two-day shipping. The executives of the auto parts retailers were saying Amazon wasn’t a big threat and sales were lackluster mostly because of two back-to-back mild winters. So, was the problem Amazon or weather?

As someone who enjoys working on his own vehicles and is fairly knowledgeable about the auto repair industry, I was confident the Amazon fears were overblown. One day or even same day (order in the morning, get your part by evening) shipping isn’t that big of a deal for the market segments the auto parts retailers target. There are basically only two types of delivery windows: You need it now (as in 10-20 minutes) or you can wait a few days.

There is not a big difference between next day and three-day shipping. Every car person knows about RockAuto.com. It’s existed since 1999 and is the best-known online discount auto parts retailer. If you know what you need and can wait, then you’ve been shopping at RockAuto and not the auto parts chain stores. Now, if I was RockAuto I might be scared of Amazon.

Many people and auto repair shops don’t want to wait. Imagine a customer drops off a car at your repair shop. You road test it, put it up on the lift, maybe even take apart a few things to diagnose the problem and figure out what part needs replaced. You have a car (perhaps half apart) up on a lift, ready to be fixed. You want to call, order the part, and have it show up in 15 minutes. You don’t want the car on the lift, clogging up your garage bay for half a day or longer. You’d rather not put everything back together, park it back outside, wait for the part, and then take it apart again once the part arrives. It works the same way if you are doing the repair yourself. You wake up Saturday morning, diagnose whatever you need to fix, again perhaps having some things apart. Most times, it’s easier and more convenient to head to the store to grab whatever part you need.

Also, as someone who lives in the rust belt and also spent four years living in a place with brutal winters (Rochester, NY), I can definitely tell you that long winters with lots of road salt is hard on vehicles. Winter weather matters for sales.

All that to say, we made (and still have) investments in some auto parts retailers. We were pretty confident they would work out (and they did) because we knew how the industry works. However as EV sales pick up there is a new, very real, risk on the horizon that we are monitoring.

With stocks being up and down based on what’s happening with COVID, it’s much harder to invest well. Even if you get something initially correct, you have to be ready for sentiment or the trajectory of the pandemic to change on a dime. Otherwise, all your winners, like Zoom or Peloton, can suddenly turn to losers.

Instead, the best thing seems to be to keep holding the businesses that we believe are attractive over the long term and not worry too much about short term fluctuations due to COVID related market movements.