As we close the book on 2020, markets are trading near their historic highs. Operation Warp Speed resulted in COVID-19 vaccines coming to market in less than 12 months. Adding to the current market euphoria, President Trump signed the latest pandemic relief bill resulting in an extension of benefits for many individuals and businesses in dire need of assistance. So, with 2021 close at hand, we thought we would provide our insights into the year ahead.
When the lockdowns occurred in March and April, we prayed the pandemic would end within a reasonably short timeframe. With nine months in the rear-view mirror, our view of a “reasonably short timeframe” has become much more realistic. We now understand that COVID will be with us for most—if not all—of 2021. We also understand that this virus, like other coronavirus strains, is evolving into new variants that will be with us for years to come. Like the flu, we will likely be dealing with COVID, or one its relatives, for many years. Herd immunity will lessen the impact. Vaccines will continue to develop and improve. In the interim, we will do our part to slow the spread and have our lives return to something that resembles the lifestyle that we think of as normal.
Business as Usual
When pondering “business as usual,” we wondered about its meaning. Oxford Dictionary defines it as an unchanging state of affairs despite difficulties or disturbances. We think of “business as usual” as an oxymoron since survival depends on responding to a constant state of change. The goal is to increase utility while improving value—with an outcome of enhanced profitability. Following are two examples:
In today’s environment, we need to spend as little time as possible indoors with other people, so the fast-food or “quick-serve” industry was well-positioned for a pandemic. Within this industry, McDonald’s continues to be perched at the top of the list, followed by Starbucks. During the third quarter of 2020, McDonald’s hit new records for both company earnings and stock price.
Since convenience now encompasses safety, McDonald’s pandemic strategy, called “Accelerating the Arches”, focuses on not just the food, but how consumers will order it—with an emphasis on drive-thru, delivery, and digital (the “three Ds”). It was able to shave 30 seconds from the drive-thru experience by concentrating on core products like Big Macs, Quarter Pounders, McNuggets, and fries—about 70% of its menu. Yet, there remains another opportunity: adding more chicken options to the menu.
When it comes to chicken and fast-food, Chick-Fil-A is leading the way. In the #3 position, Chick-Fil-A moved up two spots from the 2019 ranking, when it came in at #5—marking the second time in two years that it has jumped two slots. Its pandemic strategy includes the ability to place online orders for curbside pickup or delivery through Door Dash and Uber Eats—and, if you are a Chick-Fil-A member, make purchases by redeeming rewards.
Chick-Fil-A’s face-to-face drive-thru experience now includes outdoor hand-washing stations, enabling servers to wash their hands every 30 minutes. Employees who handle payments must wear gloves and wash their hands every time they interact with cash. (All employees are required to wash their uniforms before the start of a new shift!) Indoors, there is contactless ordering, along with plexiglass partitions and hand sanitizer stations for patrons. Additionally, Chick-fil-A started offering ready-to-heat meal kits at select locations, starting at $14.99, which are available at the drive-thru, via the chain’s app, or through its delivery partners. Plus, it started selling its signature sauces at Publix, Target, Walmart, and Winn-Dixie stores in Florida and added family meal bundles at more than 800 restaurants. Chick-Fil-A is a privately owned company; sharing in its success involves owning a franchise.
While fast-food outlets are flourishing, casual in-restaurant dining is suffering. The Cheesecake Factory has seen sales and profitability collapse and the stock price has suffered as a result, and the parent company of Bravo! has filed for bankruptcy.
Our position: business owners and managers will do everything they can to enhance sales and profits. Those adapting quickly to the new reality and embracing the changes in consumer behavior will reap the benefits. Those failing to adjust will be punished. Our goal: continue to identify the best-in-breed companies in growing industries. 2021 will present growth challenges that require continuous innovation and improvement.
Large-capitalization U.S. stocks, as reflected by the S&P 500 Index, are currently trading at a Price-Earnings multiple (P/E) of approximately 37x. The historic mean is 15.87x. Trading at a high P/E generally occurs at the bottom of a recession, when stock prices have moved up while earnings have yet to be realized. This time may be different, but we doubt it.
In general, market valuations are high, presenting risks that need to be managed through asset allocation and security selection. Our goal: continue to allocate client assets in an appropriate manner and select securities within those asset classes to capture the market returns that meet the client’s goals.
At PWA Wealth Management, we do not have a crystal ball, so we regularly study economic and market activities. In turn, we publish our understanding, so that you can better understand our investment choices and planning recommendations. Ultimately, our efforts are aligned with your goals, timelines, and risk appetite, as reflected in a custom Goal Policy Statement (GPS).
On behalf of my PWA colleagues, we send our warmest wishes for a New Year filled with good health, abundant happiness, and prosperity.
Thank you for your continued confidence.
Joseph A. Scarpo
Founder & CEO