Of course, the coronavirus story isn’t over yet. But the rate that contagion is spreading is starting to give investors hope that the economic impact will be mostly felt in the first quarter. By the time summer arrives, investors now hope it will be an event seen only in the rear-view mirror, without any lasting long-term impact. Time will tell whether that new conclusion is accurate or overly optimistic. One certainty is that commodity prices for everything from oil to copper have taken a drubbing. In a world that was either adequately or over supplied, the shortfall in near term demand will create surpluses that won’t disappear overnight, even if the virus proves to be a relatively short-term event.
This week is also a big week for economic data culminating in Friday’s employment report. The impact of the coronavirus won’t be visible at all in the numbers we will see this week. The employment report data will be based on polling done in mid-January before many of us even heard of the virus. So far, everything points to more of the same, an economy that continues to grow close to 2% with little or no visible inflation. The Boeing 737 Max production shutdown and the coronavirus will almost certainly cause Q1 growth to be a bit below trendline, but warmer than normal winter temperatures may be a slight positive offset.
Stepping back and looking at the market from 30,000 feet, however, the big picture is the stark comparison between the haves and the have-nots. The disruptors and the disrupted. Look at today’s headlines. Tesla’s stock is soaring while Ford’s profits are down by two-thirds. Forget what is going on with Tesla’s stock for the moment. The company has beaten expectations soundly and expects to sell over 500,000 cars in 2020. While that is still a small fraction of the total market, passenger car sales in the U.S. last year fell to under 5 million. Tesla may account for a small percentage of that total today, but given that the overall market for passenger cars is shrinking, every Tesla sale comes from someone else’s hide. Moreover, it is almost certain that Tesla’s unit growth will continue at a rapid pace, squeezing auto manufacturers like Ford and Daimler-Benz.
At the same time Tesla is grabbing a lot of headlines, Amazon reported record profits while Macy’s announced that it plans to close 125 stores over a three-year period. There is one certainty to economic life; you can’t grow by shrinking. Macy’s could stem near-term losses, but fewer stores guarantee fewer sales and lower future market share. Instead of just shedding stores, the company, should it want to survive, has to find a way to compete in a retail world that has been disrupted for years by the Internet. That isn’t an impossible task. Home Depot#, Best Buy, Wal-Mart# and others have found ways to co-exist and build an omnichannel presence. But Macy’s isn’t talking of spending to compete. Instead, it appears ready to shrink its way to temporary profitability. It seems ready to follow the road maps of Sears and JC Penney, not Wal-Mart or Best Buy. It will hold a big analyst meeting today to try and explain its new game plan. I will be shocked if it is received well.
We live in a world where faster chips, the pending arrival of 5G, and quantum computing are leading to the convergence of artificial intelligence, robotics, etc. to change the ways we live at breakneck speed. It won’t be long before there will be fewer people inside an Amazon distribution center than in the center of an oil refinery. Tesla and the electric car aren’t just going to change the cars we drive, add in Uber and autonomous vehicles and you quickly change the landscape for everything from car ownership to the need for parking lots. The first Tesla Model S debuted in 2012. Eight years later it will sell 500,000 cars. Five years from now many millions of electric cars will be sold every year. Gas stations will either go out of business or convert to charging stations. The transformation will require lots of capital, but it will happen.
The difference between the Internet bubble of the late 90s and today is that today’s winners are huge and growth is accelerating. That doesn’t mean that the transformation of the advertising industry from TV, newspapers, radio and billboards to online and social media won’t run its course. It will and the companies benefiting the most, Facebook# and Google#, will have to find new ways to sustain growth. That is why both are investing heavily in other arenas. In the late 90s, names like Intel and Cisco were experiencing peak growth rates. Neither was able to find a replacement growth engine. While profits continued to increase, the rate of gain wasn’t enough to justify their stock prices. What I see looking ahead is that some of the spectacular stock market winners of the past decade will flame out over the next 10 years, in the sense that they will replicate what happened to Intel and Cisco, continuing to grow but at a rapidly decelerating pace. There are cases of companies over the years that have regenerated themselves into renewed growth vehicles, but there aren’t many. Rather, what you are likely to see is that each decade will see the rapid emergence of a new class of companies that are able to build upon existing technologies and create new tools to build giga enterprises that will ultimately earn the trillion dollar market cap that Microsoft#, Apple#, Amazon and Alphabet have obtained.
The disruptors won’t just be technology companies. Technology is exploding in healthcare, in retail, in the auto industry, and on the manufacturing floor. So far, technology hasn’t changed the taste of Coke but even in a mundane world of soap, Tide pods have revolutionized how we do our laundry. A generation ago, Pampers wiped out diaper services.
For investors, obviously finding the next winners early is key. It is also important not to chase value traps. Macy’s may sell for only 5x its own estimate of 2022 earnings, but my guess is that it won’t earn what it expects to in 2022, and anyone buying the stock today will be disappointed unless the company’s management wakes up and decides to spend to compete rather than cut costs on the way to its own funeral. Ask yourself before you make any investment whether the company you are interested in has the right vision looking ahead. Is it going to be a disruptor or a disrupted company? There may be a few that are immune for now, but those are far fewer than you think.
If you are a big soccer fan, Brazilian star Neymar is 28 today while Portuguese idol Renaldo turns 35. Otherwise, most of us know Hank Aaron. He turns 86 today.
James M. Meyer, CFA 610-260-2220