The course of the COVID-19 pandemic is proving impossible to predict, frustrating health officials and governments alike as they struggle to keep the economy alive amid a resurgence of cases. It seems impossible to know for sure, but some people believe that the U.S. will see an even bigger wave of infections this fall.
Meanwhile, the stock market seems remarkably sanguine about the future, with the S&P 500 less than 5% below its all-time high, apparently looking past severe damage to the economy and the possibility that we haven't seen the worst yet.
What should investors do if they're concerned about the short-term risks? For long-term growth investors, this volatility will fade into the background in time. But a few investing themes could lessen the risk of temporary setbacks due to a fall surge of COVID-19 while still letting investors participate in promising growth opportunities. Here are four themes to consider.
Reliable cash flows
In times of economic uncertainty, investors often look for businesses with strong cash flows that are relatively unaffected by the threat of the moment. Utility stocks fit this profile, as governments grant them monopolies in return for a high degree of regulation. The market recovery since March has been characterized by high investor demand for growth, and the utility sector has largely been left behind, with the Vanguard Utilities ETF down 6% for the year.
One utility stock that combines high operating cash flow with a strong growth component is NextEra Energy (NYSE: NEE). The company operates two electric utilities in Florida, which generate reliable cash flows, and a growth business in NextEra Energy Resources, which is the world's largest generator of solar and wind energy. NextEra is also testing out the potential for hydrogen generation, announcing plans for a $65 million pilot plant and saying it's evaluating other potential hydrogen opportunities.
Demand for electrical power was relatively unaffected by the pandemic, and NextEra's adjusted earnings per share grew 11% in the second quarter. The stock got pounded along with almost everything else in March, but it has since recovered, and I think the strong business performance during the first wave of the pandemic will support the shares in a second wave. The stock has a 2% dividend yield.
Strong trends unabated by the pandemic
Some trends were in place long before COVID-19 appeared, and they continue to provide top investment opportunities that are relatively unaffected by the pandemic. The rollout of 5G telecommunications equipment is a good example. The massive deployment of equipment to increase the data capacity and speed of the world's cellular network is still in early days, and if anything, the pandemic is only accelerating demand for bandwidth.
One conservative way to invest in 5G is to buy shares of the tower stocks, such as American Tower (NYSE: AMT). Cellular carriers are scrambling to keep up with demand for data bandwidth by putting more 4G equipment on American Tower's cell towers, driving up rents for the real estate investment trust (REIT). But 5G is also developing into a powerful tailwind for the company. With the merger of Sprint and T-Mobile complete, American Tower expects significant investment by the merged carrier in the second half of the year as it builds out its 5G network.
American Tower did very well in the first half of 2020, relatively unaffected by COVID-19 and growing revenue by 10% while increasing the dividend by 20%. The stock is a way to avoid exposure to the unknowns of the coronavirus, yields 1.6%, and should grow for years to come.
Where the pandemic isn't
Investors uncomfortable with the course of COVID-19 in the U.S. could consider putting new money in companies operating in areas where a resurgence is looking less likely. China appears to have quelled the pandemic for now, and its economy has returned to growth.
Shares of online giant Tencent Holdings (OTC: TCEHY) have risen 64% since their low in mid-March but still have plenty of room to run. The stock is an excellent way to participate in the growth of social networks and digital life in China. Tencent owns the top messaging app in the country, the top online games platform, and, by user count measures, leading positions in video, news, music, and mobile payments.
The pandemic didn't hold the company back much even when China went on lockdown in the early months of the year. In the first quarter, revenue grew 26%, thanks in part to a 32% boost in online advertising, and profit increased more than 30%. Analysts expect full-year revenue growth of 23%, and a second wave of COVID-19 in the U.S. won't touch that.
COVID-19 investing themes
One obvious approach for investors anticipating a resurgence of COVID-19 is simply to invest in the themes that worked the first time around. Stocks of companies in markets related to remote work, e-commerce, entertainment at home, and biotechs working on vaccines and treatments for the coronavirus could continue to do well.
On the other hand, I think many of these stocks have had their run already and won't be nearly as strong in the second half of the year even if the pandemic gets uglier.
One e-commerce stock that I think still has much farther to go, however, is Prologis (NYSE: PLD), a REIT that specializes in logistics properties such as warehouses. The pandemic produced supply chain disruptions and an unexpected surge in e-commerce. Supply chains are still in disarray, and companies that are moving quickly to grow direct-to-consumer capability need warehouse space, as do their suppliers.
Logistics capacity will continue to be in strong demand for many quarters to come whether or not there's a second pandemic wave, and recent results show how Prologis is benefiting. Core funds from operations per share, a measure of cash flow the company uses to assess its performance, jumped 44% in the fiscal second quarter, and the company raised guidance for the full year. Management said that rent collection trends are strong, leasing activity is high, and a scarcity of logistics space will lead to $800 million to $1.2 billion in new construction of logistics facilities in the second half.
Prologis shares are up a modest 20% for the year and yield 2.2%.