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How will spending habits change in 2021?

Dave Sekera, CFA  |  08 Dec 2020Text size  Decrease  Increase  |  
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Many of the stocks for companies that have been able to capitalise on pandemic-driven trends have soared higher this year. However, we think many of those same stocks have become overvalued as investors have extrapolated the short-term growth trend too far into the future.

Meanwhile, several stocks that have been left behind during the recent stock market rally are poised to see their earnings rebound meaningfully in the second half of 2021 as consumer behaviour normalises.

Here are some of the sectors and stocks that will benefit from economic normalisation.

Department stores

Over the past decade, many department stores have struggled to compete with the rise of e-commerce. In fact, e-commerce has grown at double-digit year-over-year rates for nearly every quarter since 1999, easily outpacing the growth of in-store sales.

In the short term, the pandemic has exacerbated this trend as government restrictions and a decreased desire to go out in public have decimated foot traffic across malls.

While we fully expect e-commerce sales to accelerate this holiday season, we continue to anticipate a demand for in-store shopping over the long term. In our forecasts, we acknowledge that online spending will grow at a significant spread over brick-and-mortar; however, we also expect that physical retail sales growth will still be positive over the next decade.

Macy's (M) has struggled to adjust to market changes in recent years, and the pandemic has been a major near-term challenge. However, Macy's large and growing e-commerce, strong liquidity position, and cost-cutting will allow it to persevere through the pandemic.

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We do not believe Macy's has an economic moat, and even after modelling in a 20 per cent sales growth in 2021, we don't expect that the firm's sales will return to its prior levels following the pandemic. Further, we forecast that its margins will be under pressure until its cost-cutting efforts start to produce meaningful results toward the end of 2022. Yet, even after incorporating these attributes into our financial model, the company's stock has a Morningstar Rating of 4 stars as it trades at over a 30 per cent discount to our fair value estimate.

Even though Nordstrom's (JWN) stock has risen significantly over the past week and is now rated 3 stars, we continue to see some upside potential to our $33.50 fair value. While its sales and earnings continue to be affected by the pandemic, we believe its solid expense control, ownership of the off-price Nordstrom Rack chain, and strong e-commerce offset some of the impact and expect it will return to profitability next year. Over time, we see opportunities for Nordstrom to gain share as some rivals are hampered by financial difficulties and store closures. We continue to believe Nordstrom has a brand-based intangible asset, the source of its narrow Morningstar Economic Moat Rating.

Shopping malls

Retailers will continue to operate their physical storefronts, but they are becoming even more selective and opting to locate in the highest-quality assets. In addition, many "e-tailers," retailers who primarily conduct business digitally, are beginning to open stores in Class A malls (those that attract the greatest number of shoppers and highest sales per square foot). Physical stores in these malls allow e-tailers to take advantage of the high foot traffic, provide a showroom for products they want to highlight, and offer another channel for sales.

As e-commerce growth outpaces in-store sales, the overall demand for retail space will shrink and many existing stores and malls will close their doors. Yet, we expect the reduction in retail space will occur almost entirely among lower-quality (Class C and Class D) locations. As the vaccine is rolled out and consumers are once again comfortable returning to public venues, we expect that Class A malls will quickly rebound.

In the near term, we have lowered our cash flow estimates among the mall-focused REITs as occupancy levels drop because of heightened retailer bankruptcies and pressure to offer rent concessions during mall closures. Over the longer term, we expect the historical correlation between e-commerce sales growth and in-store sales growth to normalise.

Among the mall REITs, Simon Property Group (SPG) is the largest and manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes. We think Simon Property Group is significantly undervalued and rate the stock with 5 stars.
Trading at only about a fourth of its fair value estimate, Macerich (MAC) is also rated 5 stars. Macerich has successfully repositioned the company over the past decade as a true owner and operator of Class A regional malls. Over the past eight years, the company has sold over $4 billion in mostly lower-quality assets and recycled the capital into acquiring new Class A malls.

Rounding out the REIT sector, we rate Regency with 4 stars. While Regency (REG) is not focused on malls, it is the largest shopping centre REIT. Regency's portfolio is filled with high-quality assets focused on grocery store tenants. Over 80 per cent of its properties are anchored by a grocery store, which provides a strong draw to these locations.

Dining out and public venues

Restaurants' recoveries have been fragmented, with fast-casual and quick-service restaurants rebounding more quickly than upscale establishments. We expect more restaurants to permanently close as we enter winter and limitations on indoor dining lead to reduced capacity.

As such, we believe this opens up opportunity for surviving businesses to take share and grow earnings, and we anticipate a strong return in 2021. For the most part, across the restaurant sector, investors have looked past the current doldrums and are already pricing in the long-term recovery. Only one stock in this sector is undervalued enough for us to rate 4 stars. At about a 15 per cent discount to its fair value, we see upside opportunity for Restaurant Brands International (QSR).

While stocks in the restaurant sector have recovered, stocks for companies that supply restaurants and other public events have lagged in the rally. As patrons return to restaurants and taverns as well as other public venues such as sporting events, alcoholic beverage companies will regain much of their lost consumption.

Trading at a 30 per cent discount to our fair value, we rate wide-moat Anheuser-Busch InBev (BUD) with 5 stars. While we forecast that this year's sales and earnings before interest expense and taxes will decline 10 per cent and 15 per cent, respectively, we expect sales to rebound by 9.3 per cent in 2021, primarily owing to a recovery in on-premise consumption and the resumption of sporting events. Beyond that, we assume the secular industry growth rate, with revenue growth averaging 4.4 per cent over the medium term. Similarly, we see upside potential for Constellation Brands (STZ) and Molson Coors (TAP), both of which are 4 stars.


As restrictions are lifted and individuals become comfortable with public transportation, we foresee consumers beginning to travel again, albeit in a slightly different form than before the pandemic.

Our short-term outlook assumes that leisure, local, and car travel rebounds ahead of corporate, international, and air travel. In our long-term outlook, we assume a full recovery in travel demand, based on past demand shocks, by 2024 (with the exception of cruise lines, which may take longer). Since the positive announcements on the efficacy and safety for several vaccines currently under development, stock prices for the companies that will be the primary beneficiaries of increased travel (like airlines and hotels) have soared and risen into 3-star territory.

Among the secondary beneficiaries of resumed travel, we think Sabre (SABR) still has upside potential. At an almost 30 per cent discount to our fair value, we rate the stock 4 stars. Sabre holds the number-two share of global distribution system air bookings (38.8 per cent as of the end of 2019 versus 37.1 per cent in 2018). The company also has a growing IT solutions division that focuses on the airline, hospitality, and travel-agent end markets. Transaction fees, which are tied to volume and not price, account for the bulk of the firm's revenue and profits.

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

See also Morningstar Guide to International Investing.

is chief U.S. market strategist for Morningstar.

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