In your four decades in the investment industry, you’ve managed through a number of market crises. How is Harris Associates thinking about the post-pandemic “new normal”?
Nygren: There’s been so much written about the “new normal,” but we think investors need to distinguish between two things. Where have we seen an acceleration of trends that were already in place to adapt to superior technology? By contrast, where have we seen reactions to a once-in-a-hundred-years event – the pandemic – that we’re likely to reverse out of quickly?
What are some examples of accelerating trends, as compared to shorter-lived pandemic reactions?
Nygren: I think the easiest example is touchless technology for things like restrooms, elevators, etc. It’s a superior technology and there’s no reason we’re ever going back. Our strategies implement companies that have benefited from the acceleration of trends that were already in place. Think of streaming displacing linear television. Streaming companies may not see the same kind of growth going forward that they saw during 2020, but we don’t think viewers are going back to scheduled programming.
Another example is high-speed internet companies, which benefited during 2020 from the need for better connectivity. There’s no reason to now downgrade to slower service as the pandemic recovery moves forward. E-commerce trends also accelerated – growth could be slower in years ahead, but there’s no reason to think people will go back.
Is there a sector where you think Harris’s views on post-pandemic trends differ from the broader consensus?
Nygren: Business travel and leisure travel is an area where I think our point of view differs quite a bit from the market, including resorts, hotels, and travel-dependent financial companies. Business in this area went down to about zero during the pandemic crisis. Many of these companies were hurt – but we think there are leaders in this space and there is evidence that leisure travel is coming back quickly. For example, travel demand among senior citizens who have been vaccinated in the US has increased.
Similarly, there’s reason to think there will be some decrease in business travel, but in our view business travel will not end. We think business travel is going to come booming back once it’s safe to be out again. Commercial property maintenance and leasing companies also had a tough year, and there’s concern that people aren’t going back to the office. But we believe many employers will expect their employees back to work the day after they’re vaccinated, and we don’t foresee a crash in commercial real estate.
Are there any companies that investors may be overlooking that could stand to benefit from the business and behavioral changes introduced by the pandemic?
Nygren: We think a beneficiary that many don’t really think of is financial companies. There is a large potential cost save from the move to mobile banking. It’s been suggested that cashing a check in person costs a bank something like four dollars, where it costs about 40 cents at an ATM and four cents on a mobile phone. Again – online banking trends have accelerated as a result of the pandemic and we don’t think people are going back, which could translate into significant cost reduction for some financial companies. We believe they could benefit from the ongoing reopening.
How has Harris Associates’ long-term horizon been affected by the pandemic?
Nygren: We believe in continuous improvement, but our general approach has not changed. We’re value investors and do fundamental analysis and build focused strategies that are different from the indices, such as the S&P 500®. We’re always looking for information that indicates our previous opinions weren’t right, but we have no confirming evidence that suggests we should be changing.
At the beginning of the pandemic, we didn’t believe that the economy recovery was complete. We saw no signs of excess consistent with an economic peak, and were focused on financials, industrials, consumer durables, and energy. When the severe recession hit in March, we forecasted improvement in the second half of 2020 and return to 2019 levels of growth in 2021. We still believe we’re on this path to a second-quarter recovery.
Was there anything that surprised you about the way in which markets reacted to the pandemic?
Nygren: The market pretty much treated all stocks equally. It didn’t seem to matter how close to the eye of the storm they were or what their balance sheet looked like. We think our approach still looks pretty cheap on that basis. As a result, we think this period is the most exciting investment opportunity since the global financial crisis.