WFH may be the trendiest acronym on Wall Street. Whether it’s videogames, virtual meetings, or online shopping, the pandemic accelerated growth for “work from home” companies, while the broader economy hit a wall.
Yet some analysts now see better risk/reward in stocks benefiting from an economic reopening. It’s a contrarian idea, partly because WFH stocks still have the momentum. But the gaps between WFH and Reopeners are now so wide that the latter may have more to gain.
“We see better risk/reward in the Reopeners,” says Ben Laidler, CEO of Tower Hudson Research, an independent research firm. Tower’s WFH and Reopening baskets—15 stocks in each, which are highly sensitive to pandemic news—have diverged sharply. WFH stocks trade at five times book value, versus two times for Reopeners, and the Reopeners have lagged behind WFH stocks by 100 percentage points this year.
The disparities make sense, based on earnings trends. WFH is dominated by tech and consumer stocks— Amazon.com (ticker: AMZN), Netflix (NFLX), and Peloton Interactive (PTON), for instance—while Reopeners include such cyclicals as Boeing (BA), Marriott International (MAR), and United Airlines Holdings (UAL), all slumping. Earnings estimates have gone in opposite directions: WFH forecasts are up 30% since January, and the Reopeners are down 120%.
There is much to like about WFH stocks, beyond the pandemic. Many white-collar workers aren’t going back to the office, benefiting cloud technologies. Even if we start venturing out for fun, the competition at home has gotten stiffer after we splurged on big-screen TVs, stationary bikes, and smoothie makers.
Yet the Reopeners may be nearing an inflection point. Vaccine approvals are probably coming in the next few months, lifting consumer and business sentiment. Investors may reposition for a cyclical recovery in 2021, pending the election results. And Reopeners have “operating leverage,” says Laidler, since they slashed operating costs. Small revenue gains may fuel a big impact on the bottom line.
Exchange-traded funds capture both themes, albeit with shortcomings. The Direxion Work From Home ETF (WFH) holds 89% in tech, including companies like Twilio (TWLO), CrowdStrike Holdings (CRWD), and Zoom Video Communications (ZM). It also holds stocks that stretch credulity for the WFH theme, such as Xerox Holdings (XRX), down 45% this year, and Latin American telecom América Móvil (AMX), down 19%. The ETF has matched the S&P 500 since launching in late June, returning 12.1%, versus 12.3% for the index.
There isn’t a Reopening ETF on the market—yet. One way to capture the theme: bet on travel and leisure. The U.S. Global Jets ETF (JETS) is a play on a recovery in passenger air traffic. Airline revenues haven’t been making much of a comeback and will still be down 50% in 2021, compared with 2019 levels, for major U.S. carriers, according to J.P. Morgan. But 2022 should be a recovery year, with revenue down an average 15%, and profit may materialize on a lower cost base.
The Invesco Dynamic Leisure and Entertainment ETF (PEJ) would benefit from a recovery in consumer spending, too. It holds fast-food chains, hotels, casinos, and media stocks, including Madison Square Garden Sports (MSGS), Cinemark Holdings (CNK), and Live Nation Entertainment (LYV)—bets on consumers going back to live sporting events, the movies, and concerts.
None of these funds will thrive without good news on a vaccine and economic reopening. But they may be poised for liftoff if we are able to stay home a bit less.