For the first half of the pandemic a simple investment rule would have served you well: buy anything that was being plugged as a ‘tech’ stock – and dump nearly everything else. Lockdown ushered in a new era in which everything would be done online, rendering the traditional bricks and mortar economy. Since 'Pfizer Monday' on 9 November, when the results of the first phase 3 trials of Covid vaccine were made public, the opposite advice has served investors just as well: buy any bricks and mortar company that was dumped during the first phase and sell anything touted as a tech stock. The economy was going to spring back quickly into life, leaving over-valued tech stocks struggling to maintain their toppy values.
International Consolidated Airlines – the parent company of British Airways – has nearly doubled since November. Cruise operator Carnival has also doubled, as have pub operators Marstons and Mitchell and Butlers, while Cineworld is up three times. The more boring and plain vanilla your company, the better. Companies don’t come much more ‘old economy’ than Card Factory – which sells greetings cards in garish shops, many in tired, second-rank shopping centres. But it is up two and a half times since November. If you timed it right that is a bigger profit than you could have made on Amazon at any point during the pandemic. Although there is an emphasis on the ‘if’ in that sentence. Indeed, it was a contrarian taste for something boring, seemingly out of date – but perversely profitable – which made me pick up a small slice of Card Factory for my own portfolio in the summer of 2019. I am still sitting on a loss of 40 per cent on that one.
But have these value stocks now run their course? It is remarkable how shares in old economy stocks have continued to do well even as dark clouds have gathered on the reopening of economies around the world. When the Pfizer results came through – early on in lockdown number two -- there was huge optimism that the vaccine rollout would begin before Christmas, and that by Easter everything would be back pretty well to normal. Then came the Kent variant, followed by a lockdown which dragged on even longer than that of spring 2020. No sooner did things begin to reopen than the South African, Brazilian and now Indian variants started to worry government advisers. While an outright ban on foreign holidays was lifted this week, you would have to be brave to think that the tourism industry is going to have anything like a normal summer. It is beginning to look like a second lost season for the industry.
But even if life did magically return to normal next week, many old economy companies have acquired something nasty during the pandemic: debt. Take Cineworld. Whether people will return to the cinema with such enthusiasm as they did before the pandemic remains to be seen – cinemas were only allowed to open their doors this week – yet even if they do the company will have to wade on with an extra $1 billion of debt, having burned its way through $60 million a month while its premises were closed and earning no revenue.
There is also, of course, the possibility that the original narrative of the pandemic – that it would permanently change our spending habits – may turn out to be correct. Some stocks most deeply affected by the crisis, such as Intercontinental Hotels, are now trading at prices higher than before the pandemic. Yet there must surely be a huge question mark as to whether business travel will ever return to the levels it was. Now that companies have found they can function without face-to-face meetings, slashing business travel seems an obvious way to cut costs in future.
Over the past few weeks there has been a trace of the run in value stocks running out of steam. Share prices have begun to tail off and in some instances fall. This week may have seen the biggest phase of reopening yet, but as so often, the stock market has shown itself to be forward-looking. Just as the drinkers return to the pubs, some value investors appear to be drinking up and leaving.