Reopening Trade - Part 2

This is not investing advice. Seek a financial professional before making important financial decisions. This article is for informational purposes and should not be interpreted as a recommendation to buy/sell/or trade any security.


We are more than a month into our reopening trade. So far...it's been highly profitable and our timing was close to perfect. But some of our reopening trades performed better than others. In this update we share the trends we are seeing and what they mean for positioning.


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The table below was created using the 73 reopening stocks we selected for consideration in our first publication on the reopening trade. The stocks were largely beaten down with en emphasis on those that were directly impacted by the pandemic. On the whole...these stocks performed phenomenally well, rising 35% in the past month but sectors and industries ranged from 16.7% to 66% over the same period.


Some of the variance can be explained by catch up performance. There is a 32% correlation between the remaining drop YTD and the rise over the past month. But the rest is being driven by either company specific fundamentals or differences in sectors and industries. (See note below)


Note: The "Exchange Traded Fund" is not an "Industry"...some of our reopening trades were ETFs instead of individual stocks. This was a mistake in creating the table but instead of fixing the table we opted to just explain the error.


We took profits on reopening stocks that are down less than 30% YTD because we think these are no longer obvious winners. Many of these companies could still be in big trouble. We don't know. We didn't have time to evaluate every company. Our thesis focused on the fact that the world changed the moment that the election ended and vaccines were announced with >90% effectiveness ... but that investors would be slow to price this in. We discussed this at length in our periscopes below.


  • Why many are slow to embrace the reopening

https://twitter.com/IntuitEcon/status/1328510004106723329?s=20


  • Reopening tactical strategy ... why airlines and cruise lines are a lot like #altcoins in Fall 2017.

https://twitter.com/IntuitEcon/status/1331050260207026176?s=20


Our focus is on the industries and sectors that are still down more than 30% YTD. Within these areas we see some interesting differences. Furnishings were by far the worst performing group over the past month...followed by airlines. But what we really want to know is which sectors/industries could jump the most over the next month or two. Its hard to see that using this table.


To get a sense for the sectors and industries with the most near term potential we want to take into account both the jump and the performance YTD. The basic idea is that if the stock has already run up a lot then it may not run up as much near term. At the same time...if the stock is still down a lot then it probably has more room to run. Thus, we calculate a "Catch Up" metric by subtracting the monthly performance by the absolute value of performance YTD.

From this perspective the best industries/sectors are furnishings, travel services, and airlines. But how much stock should we put into this theory?


Applying the same "Catch Up" metric to the original list of stocks reveals some more detail on what's going on here. Half of the top ten are cruise lines and airlines. While airlines are technically "Industrials" they are obviously heavily tied to "Travel Services" as well which remains the single most beaten down industry in our list of reopening stocks.

The other top companies in the list look interesting as well. We bought more KBAL today. It sells furniture...mostly to businesses. We get that people are working more from home now...but they still need chairs right?


Suffice to say we are heavy on "Travel Services" ... especially airlines and cruise lines. The simple fact is Americans are tired of sitting at home and watching movies. They are ready for a vacation.


Sincerely,

Bernard


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