The news on 9 November of successful early trials of a coronavirus vaccine sent global markets soaring with the most beaten-down sectors like travel, leisure and hospitality, energy and banks enjoying their best daily or weekly performance in years. This has been followed by further positive news on other vaccines in development.

It remains the case, however, that many of the top-performing stocks in recent times are still structurally challenged, vaccine or no vaccine.

Airlines still face huge over-capacity, as do hotels and restaurants, oil firms face a low-carbon future dominated by renewables and banks still face large bad loan provisions and historically low interest rates.

There are other sectors, however, which have been equally hard-hit in stock market terms but which are much better poised to rebound once the global economy reopens. In this article we look at areas of likely strength as well as sectors where the risks still look elevated. The table overleaf shows some of the UK market’s laggards over the last 12 months and could highlight some names worthy of further investigation.

TOTAL SHUTDOWN

Covid-19 brought economic activity around the world to a sudden and dramatic halt. Companies everywhere slammed the brakes on, stopping all non-discretionary investment including advertising and hiring, as they hunkered down.

There was no road-map for a global pandemic, and the fear amongst the public and the business world was almost palpable. People locked themselves indoors, while only firms providing absolutely essential services were allowed to remain open, most in a much reduced capacity.

Investors fled to safety, bidding up bonds and equities with ‘bond-like’ characteristics. Technology stocks became ‘havens’, especially those which provided alternative ways of living and working during lockdown.

In the retail sector, pure online operators were amongst the biggest beneficiaries of Covid, with consumers flocking to the internet to buy everything from appliances to homewares and musical instruments.

ROAD TO RECOVERY

Now, the hope of a vaccine means there is a possibility of life getting back to something resembling ‘normal’ in the foreseeable future. Yet, just as none of us had ever experienced a pandemic, the world has never experienced a recovery from a pandemic either.

The likelihood is that whereas the onset of the pandemic was like a light being switched off, the recovery will be ‘more like a dimmer switch turned up slowly’ to quote Julie Palmer, partner at insolvency and business services firm Begbies Traynor (BEG:AIM).

The good news is that the global economy is running so far below its potential growth rate that central banks are unlikely to step back from their easy money policies. To the contrary, they will want to keep interest rates low to encourage banks to lend so that as many companies come through the crisis as possible.

For investors, betting on the recovery isn’t a simple question of dumping ‘growth’ stocks in favour of ‘value’. In fact the idea of dividing stocks into silos isn’t helpful or useful. What we are looking for are companies with long-term structural growth prospects which can cash in on the cyclical recovery but which have been overlooked at this early stage.

EARLY WINNERS

As noted earlier, two of the areas of corporate spending which were hammered at the onset of the crisis were advertising and recruitment. Both areas are essentially investments in growth, so it makes sense that companies pulled the plug early. It also makes sense that with business opening up again they should be amongst the first beneficiaries.

Advertising is a particularly good bellwethers for the economy because companies will increase spending on advertisements when  they are feeling positive and scale back during tougher times.

The question is where any potential increased spend will go. The acceleration in the shift to a more digital economy means businesses may look online and go direct to the likes of Facebook and Google.

However, the need to manage reputational risks from being associated with controversial or extreme content on the internet means there is probably still a place for agencies.

This could benefit WPP (WPP) which is currently in the process of executing a turnaround strategy following the acrimonious departure in 2018 of founder Martin Sorrell.

Having announced improving advertising trends in a third quarter update (29 Oct), chief executive Mark Read and well-regarded finance chief John Rogers are continuing the process of simplifying the business.

Shore Capital analyst Roddy Davidson is bullish on the difference simplification can make to the business. He says: ‘Specifically, we are positive on the long-term upside potential created by a proactive approach towards: simplifying operations/merging brands; fostering internal cooperation; driving competitive advantage through concerted investment in technology; unlocking efficiencies; reducing debt; realising value from non-core operations; and pursuing a more disciplined capital allocation policy.’

Sorrell’s new venture S4 Capital (SFOR) has enjoyed strong gains this year thanks to its exclusive focus on digital advertising.

The relevance of television as a medium has been bolstered by the pandemic as lockdown measures saw people turn to the box to keep them occupied, whether they were streaming content or watching live TV.

The problem for broadcasters such as ITV (ITV) is that while they had plenty of eyes on their product, few advertisers were in the mood to spend earlier this year.

However, like WPP, ITV’s third quarter update revealed an improved advertising trend. It also revealed a recovery in its ITV Studios production business which had been hit by an enforced hiatus during the first lockdown.

ITV is a running Shares Great Ideas but investors looking for an alternative way to play the impact of a reopening of the economy on advertising spend should look at its effective sister operation in Scotland: STV (STVG).

STV has a very dominant position in the Scottish commercial television market and is growing its digital footprint while also increasing its investment in production. It benefits both from the improvement in national advertising revenue but also its own regional ads.

In Q3 regional advertising was up 8% and video-on-demand advertising grew by 10%. TV viewing was up 13% and online viewing increased by 82%. Based on Shore Capital forecasts, at 268p the stock trades on a 2021 price to earnings ratio of 7.3 and yields 7.8%.

Events firms should also benefit if a vaccine helps unlock the global economy, with the scaled-down digital events many firms have been forced to run in the interim not generating the kind of returns seen with physical exhibitions and events.

This explains the positive response of Informa (INF) to news of a vaccine and other media firms which often dovetail events alongside professional information services and publishing could also be beneficiaries such as RELX (REL) and Euromoney (ERM).

RECRUITMENT BOOST

In the recruitment sector, the major quoted companies were quick to respond to the sudden downturn in demand by cutting their own outgoings and trimming their headcounts.

In its full year results to the end of June, Hays (HAS) – the UK’s largest staffing firm by market value and revenues – posted an 11% drop in group net fee income with an exit rate of a punishing 34% fall in income.

While acknowledging market conditions were ‘far harsher than I have known’, chief executive Alistair Cox was able to point to ‘modest signs of improvement’ in the permanent job market and ‘relative resilience’ in its specialist temporary markets of IT and Life Sciences.

Encouragingly, the Office for National Statistics said last week that the number of job vacancies in the UK jumped by nearly 40% or 146,000 to 525,000 in the three months to October.

Similarly, the UK’s Recruitment and Employment Confederation (REC) reported an upsurge in job advertisements in the first week of November to 1.36 million, the highest level since early March.

The REC noted a strong recovery in demand for construction, logistics and food processing roles, although it noted there was a ‘stark difference in demand across the regions’ with the number of job adverts down 19% in London compared with March and up 37% in the north west of England.

Having protected its business during the shutdown and shored up its balance sheet with a £200 million capital raise early on, we think Hays is well placed to capitalise on a reopening not just of the UK but the global economy.

While its shares jumped 20p on the vaccine news, they are still nearly 30% below their pre-pandemic highs and close to 40%
below their 2018 highs meaning they still have plenty of upside.

THE TRAVEL AND LEISURE SECTOR STILL FACES BIG RISKS

Travel and leisure stocks have shone as the lockdown losers are now considered to be vaccine winners with potential for a big rebound in earnings.

The market is looking towards next summer and pricing in the chance that demand, and therefore earnings, will move significantly higher than this year and start returning towards normality again.

Summer is the crucial trading period for travel and leisure stocks as they look to make big profits that more than offset losses made during the quieter winter months.

Any signs of progress being made with a vaccine will boost investor sentiment towards the sector as it raises the chance of people being able and willing to go on holiday or spend more on leisure activities.

But this strong recovery in demand that’s being priced in for summer 2021 is by no means assured.

Even if a vaccine is successfully developed, approved and manufactured by the end of this year, the logistical challenges of producing something at an unprecedented scale that has never been commercialised before means it could take time for a full roll-out globally and for people to be able to move freely between countries again without any restrictions, something which is fundamentally important for confidence in the sector.

Selective exposure makes sense – with some areas more likely to see a rapid rebound in demand than others.

Hollywood Bowl (BOWL) 181p

The UK’s largest 10-pin bowling operator Hollywood Bowl (BOWL) is well positioned for the opening up of the economy and benefiting from pent-up demand. The company saw strong customer appetite after reopening the estate from mid-August, and a similar result should be expected once the current lockdown measures are removed.

Performance reflects the actions of management to equip venues with Covid-19 safety measures enabling social distancing and ensuring the safety of customers and staff. The quality and attractions of Hollywood Bowl’s out-of-town sites was demonstrated by the fact that the majority of them operated at maximum capacity with trading levels similar to last year at weekends and holiday periods.

Despite closing venues for five months and seeing a 38.7% drop in year-on-year revenues the company managed to report a marginal profit for the year to 30 September 2020. This underscores the huge potential in store once the economy reopens.

FOOTFALL MAY NOT INCREASE QUICKLY ENOUGH FOR FOOD-ON-THE-GO

A reopening of the economy facilitated by an effective Covid-19 vaccine would do wonders for the fortunes of the footfall-dependent food-to-go companies, names such as bakery retailer Greggs (GRG), sandwiches-to-salads maker Greencore (GNC) and food-to-go rival Bakkavor (BAKK), not to mention travel food outlet operator SSP (SSPG). Shares in this lately-unloved quartet turned up on vaccine optimism, yet they remain well below their pre-pandemic peaks.

But first a dose of reality; it will take time to deliver a vaccine on a vast scale in the UK and there is no immediate prospect of social restrictions being lifted. Then there’s structural change to consider. Working from home has become more ingrained, so a return to commuting into city centres by millions of Britons is uncertain.

Any pick-up in supermarket shopping visit frequency driven by a reopening would deliver a much-needed boost to sandwiches firm Greencore, a casualty of the coronavirus lockdowns which have kept commuters at home and caused city centre footfall to slump.

Shore Capital continues to see ‘disrupted trade for Greggs and other food-to-go players well into full year 2021, which means that despite very favourable comparatives, the two-year sales stack is likely to be challenging’.

Greggs was a market darling before the Covid disaster struck, but its world was turned upside down by the economic shut down and the requirement for social distancing. The vegan sausage rolls, coffees and doughnuts seller received a negative response to a relatively robust third quarter trading update in late September. Greggs said activity had picked up in September following a slower August, though it reiterated the outlook remained uncertain with ‘rising Covid-19 infection rates leading to increasing risks of supply chain interruption and further restrictions on customer activities out of the home’.

Like-for-like sales in company-managed shops averaged 71.2% of the 2019 level in the 12 weeks to 26 September, before the second lockdown. Shore Capital believes it will most probably be in the 2023 financial year rather than full year 2022 before Greggs returns to its pre-pandemic trading and profit levels, with the brokerage noting ‘a disrupted new store development programme too that takes energy out of the hopper whilst a vertically integrated players faces the double whammy of negative operational gearing’.

SERVICES FIRMS POISED FOR PICK-UP

More businesses are open during the current lockdown than before with many designated as essential to the economy.

One example is specialist services group Marlowe (MRL:AIM) which provides water treatment, fire safety, air quality and compliance services. All its services are non-discretionary and therefore generally insulated from trends in the wider economy.

The strategy is to grow through acquisition and integration and build enduring long-term customer relationships and annuity-type recurring revenues. Revenues has grown 10-fold from £20 million in 2015 to around £200 million, 78% of which is recurring.

In a similar vein multi-brand Franchise company Franchise Brands (FRAN:AIM) is focussed on building market-leading businesses in selected customer segments by organic growth and a buy and build strategy.

It operates a ‘capital light’ model which means that each franchisee is expected to provide the capital investment and the company earns fees through start-up charges, license fees and product sales.

The bulk of revenue comes from providing commercial drain clearance and repair and maintenance services on a 24/7/365 basis through the Metro Rod and Metro Plum brands. The company’s purchase of leading pump supply and installation business Willow Pumps is expected to expand the range of services in this segment.

Franchise Brands (FRAN) 102.7p

Shares in multi-brand franchising company Franchise Brands (FRAN:AIM) languish within 20% of the March lows and 50% below pre-Covid-19 levels which doesn’t reflect the steady recovery in trading since June 2020. Buy for recovery potential.

Founded by Stephen Helmsley and Nigel Wray, the company’s business to business division is deemed an ‘essential business’ and is composed of Metro Rod, Metro Pumps and recently acquired Willow Pumps. From the start of June the Metro businesses have grown by an average of 8% per month with September actually 9% higher than the prior year.

At the third-quarter update on 28 October the company said it was confident of meeting market expectations for generating full-year revenues of £48.6 million and adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) of £6.1 million.

RESTORE (RST:AIM) 353.1p

A reopening of society thanks to a vaccine would benefit the office removals part of Restore (RST:AIM).

Companies are likely to think hard about their office requirements and we could see many move to smaller premises or have a hybrid model for working.

The latter could involve staff working from home permanently for a few days a week, so companies would have less requirement for floorspace as everyone could hot-desk when they do come to the office. In essence, Restore could see a bumper period where it helps businesses right-size their office requirements.

Restore could also benefit via its IT recycling operations if companies decide they don’t need as many desktop PCs. It could also see an uptick in shredding services.

Its document storage operations provide a resilient backbone with money coming in during good and bad economic conditions.

Analysts forecasts 12% revenue growth and 39% pre-tax profit growth in 2021, according to Refinitiv.

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