Dot Gov Impact on Share Prices / Performance

Firstly hope everyone is keeping well and safe?

What’s everyone’s thought on the the companies that the Government partner with to help us all get through this crisis

Dyson (Private) / Amazon etc.

Who would get a private order from them and what impact do you think on the overall price?

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Hi there!

All safe on the Evarvest side, firmly locked down at home in most of the countries where our team are based!

Thank you for the question / discussion - this is definitely one of the most interesting dynamics out there right now for me along with airline stocks & oil+gas companies. I’ll try to cover my initial high level thoughts here but this is a topic which I probably won’t be able to cover comprehensively all at once - so please feel free to shout if you have any follow up questions and we can explore this together!

Re. Amazon - they will be using its logistics and delivery platform to help governments many of the countries where they have a presence - in the UK this will mean helping with the distribution of COVID-19 testing kits and potentially also PPE. Arguably for amazon however, the impact on their revenue from purely government contracts might be somewhat meaningful but I would argue the impact on their revenue from people staying at home, using services such as Amazon pantry / Amazon fresh and also ordering other miscellaneous items (home gyms, office equipment, etc.) could add up to be even more meaningful.

You would need to dig into a company’s revenues, the expected benefit from government spending + other boosts to revenue from their business model and offset that with any potential declines in revenue from other parts of the business which may struggle under the new normal - with the Amazon example again this could mean lower overall spending on their services as consumers might spend less on discretionary items given they may be conscious about their own disposable income over the coming months.

There are also a host of other companies who will see elevated activity in the short term due to government contracts being awarded for their services. I’ve listed a few of the publicly traded names here in addition to Amazon for you to dig further into if you would like to do so: Johnson & Johnson, Pfizer, CVS, Walgreens, Intuitive Surgical, Ping An, Siemens Healthineers, Fresenius, Teladoc Health & HCA Healthcare. Each of these companies may benefit in the short term but the impact on each company will be very specific - based on how big the government spending uplift is as a proportion of the company itself and whether that boost offsets any losses they may be making elsewhere.

From an investment perspective, I would argue that this theme can be slightly misleading - our instinctive reaction is to think along the lines of “there must be some companies out there which will benefit from this” - which I think reflects the sentiment behind your question. The reality however is that most other investors also have the same instinctive question come to mind, and the answer to that seemingly simple question is much more complicated than it might seem at first.

What makes it difficult to capitalise on something like this is the fact that in frictionless markets (such as western / developed equity markets with many sophisticated investors participating), this usually means the expectation for companies to benefit from government spending is reflected in the share price fairly quickly (you usually have a small window of a few minutes to a few hours once an announcement is made by the government to figure out the likely impact on a company’s valuation and make a trading decision before the rest of the market catches up and the price reflects the expected increase in company value).

I would therefore recommend caution before diving into investment decisions based on these types of impulses, and instead advocate much more strongly for trying to find high quality companies and brands - which may well include the likes of Amazon, J&J, Healthineers and others - companies which shouldn’t struggle from a cash / liquidity / debt perspective, and investing in them for the long run. If you take a 5-10 year view on this situation, it’s likely that we will have fully recovered from the pandemic in the next couple of years and those companies which are best placed to lead the recovery are the ones which will make you outsized returns over the long tun.

For the shorter term trading decisions it’s very easy to get them wrong and can be very difficult to time the trading decision correctly. Of course you can follow simple trading strategies and rules to limit your overall exposure by make small trades across a large number of companies in the hope that you make more winning trades than losing ones, but I would definitely recommend caution when going down the short term trading path, and if you do choose to do so, I would recommend you have a clear idea in mind of what you want to achieve, and what all the different factors at play might be - from government contracts to other headwinds / tailwinds for revenue, to the impact on labour / wages / costs for the company, to market psychology and overall sentiment.

If helpful, here’s a list of companies off the top of my head which could be potential “winners” coming out of this pandemic (which kind of explains why their share prices have mostly held up better / seen less declines than other parts of the stock market):

Working from home: Microsoft, Apple, Broadcom, Intel, Logitech, NVidia, Zoom, Citrix, Cisco, Sophos

Quarantined at home: Facebook, Samsung, Activision Blizzard, Sony, Netflix, iQiYi, Amazon, Ali Baba, Alphabet, Tencent, Delivery Hero, JustEat Takeaway.com

Paying from home: Visa, Mastercard, Worldline, Square, Paypal, Adyen

I appreciate that this might not have been the most straightforward response - but it’s a messy situation! Please let me know if you have any questions or if anything is unclear and I’ll be happy to try and help further!

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Tough question to answer! :wink:

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Morning HarshP,

Thank you for the reply, found it really useful and thought provoking. Thank you for sharing your view on it at depth.

The companies that you have listed for WFM, Quarantined, and paying at home are all interesting, some big brands in there which have shown year on year growth this crisis will only highlight their services even more.

It will be interesting to see what happens 9-12 months down the line as, will companies adapt a more flexible working from home policy even when this mess is over? if so, i would think the likes of CISCO / Citrix and other the security software companies that will benefit out of this.
Even further reduction on cash transactions moving forward although this is the trend the world is going.
Gaming culture to grow … impact GPU and INTEL/AMD…

This will forever change the way people behave, socialise, work and spend.

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I think this will certainly change the world we live in going forward.

We’ve had a remote working culture from day 1 with an office for those who prefer it. It’s a great way to hire excellent talent without being restricted by borders of the country you’re in. Plus for new companies and startups who haven’t raised big $$ yet, it saves on unnecessary office/co-working costs which in cities like London can be an enormous expense!

Current situations aside I am personally really excited to see how the world adapts after all this is over. I’ll be surprised if a lot of companies don’t make a shift in their culture to suit a flexible setup as with the technology/software we have access to there really isn’t any reason not to allow it. I’d also be interested to see if staff productivity changes at all with all these swift changes! Perhaps it’ll prove remote working is the way to go moving forward, unless you’re also having to home school those kids :wink: that could be a tough setup!

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I usually work from home the biggest change for me is having my partner and my child at home. It’s been eventful to say the least.

Of course we don’t know for sure, but if this last until September then I might have to train my daughter to respond to emails and join calls.

I think productivity could be interesting depending on what you do for a living. It does take some time to adjust to working for home and discipline.

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Lol! I must admit it’s been entertaining on a few zoom calls i’ve had the past 2 weeks seeing kids charging at each other in the background! :joy: I’m looking forward to being a dad myself but I’m not going to lie… i’m glad I haven’t timed it to coincide with the world’s isolation!

The main issue for me is that i’m finding it hard to switch off from work as it’s always there. Being used to remote work aside, I usually do work from the office Monday to Friday so am looking forward to having that separation again once this is over. Mentally I feel guilty if i’m not in work mode 7 days a week when everything’s at home. At least I’m getting plenty done!

If you train your daughter in emails and calls, let me know! Perhaps a new Evarvest intern :wink: